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Financing a College Education

Financing a College Education. Math chapter appendix. Cost of College. Average tuition $4,000 (in state), $16,000 (private) [estimated for 2000-2001] Room and board, books transportation: $6,000 (in state), $8,000 (private) $10,000 (in state) $24,000 (private)

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Financing a College Education

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  1. Financing a College Education Math chapter appendix

  2. Cost of College • Average tuition $4,000 (in state), $16,000 (private) [estimated for 2000-2001] • Room and board, books transportation: $6,000 (in state), $8,000 (private) • $10,000 (in state) $24,000 (private) • * 4 = $40,000 (in state) $96,000 (private) • * 6% each year annual inflation = ?? In 18 years?

  3. Example from textbook

  4. Considerations in college saving decisions • Tax favored alternatives • Investment strategies • Risk • Contribution limits • Financial aid implications

  5. Tax Favored Alternatives • Section 529 Plans -- qualified state sponsored tuition plans • Series EE and I savings bonds • Education IRA • Hope credit • Lifetime credit

  6. Section 529 Plans • Tax benefits • Investment income state and federal tax deferred • Not Taxed at withdrawal if used for qualified education expenses • Limits • Varies by state, current max is about $250k • May reduce financial aid • No income restriction • Problems if child does not attend state school

  7. From Charles Schwab’s Web Site529 College Savings Plan Account A 529 account is a state-sponsored education savings program that allows parents, relatives and friends to plan and invest for a child's college education. The 529 allows for significantly higher contributions than some other options.

  8. The account is set up by an adult for the student. While contributions aren't tax-deductible, earnings in the account grow tax-deferred until withdrawn to pay for qualified college fees and expenses. When withdrawn for qualified higher education expenses, the account is taxed at the student's generally lower tax-rate.

  9. College Planning Resources • Plan to meet your education goals. College Planner Calculator. • Compare Education Savings Plans.

  10. Details: 529 College Savings Account • Minimumto Open • $2,500 • ContributionDeadline • December 31

  11. Tax Advantages • Annual Gift Tax Exclusion Can contribute up to $50,000 ($100,000 per couple) per beneficiary in a single year if contributor elects to recognize that gift over 5 years for tax purposes and the contributor makes no other gifts to the student.

  12. Earnings • Tax-deferred • Withdrawals • Taxed at student's rate when used for qualified higher-education expenses.

  13. Contributions • Who's Eligible? • Any U.S. citizen or resident may establish an account to help prepare for college expenses. • Only the account owner may make contributions to the account. • No age restrictions on designated beneficiary.

  14. ContributionLimits • $127,000 lifetime limit per beneficiary (may be indexed for inflation). • Contributions may not be made to a 529 Plan and Education IRA for the same beneficiary during the same year

  15. Withdrawals • Qualified • No penalty when used for beneficiary's qualified higher education expenses if account has been open at least 24 months and the money is used at an eligible institution for qualified expenses. • Taxed at student's rate when used for qualified higher-education expenses.

  16. Ownership • Account is owned by the contributor. • Account owner selects investment strategy when initial contribution is made. • Account owner is entitled to select or change designated beneficiary (to a member of the student's family) or even take funds back (may be subject to penalty) if that beneficiary elects not to attend college or receives a scholarship

  17. Penalty Withdrawal of earnings for non-qualified educational expenses are taxed as ordinary income and may be subject to a 10% penalty.

  18. Hope Scholarship Credit • About $1,500 each year indexed for inflation • A credit against federal income tax, so you you must owe tax to take advantage of this • Phased out for upper incomes • Expenses of first 2 years of undergraduate study • No drug convictions

  19. Lifetime Learning Credit • 20% of first $5,000 of qualified college expenses (first $10,000 of expenses after 2003) • Phased out for upper incomes, but a person must owe taxes for a credit to be useful • Can’t be combined with Hope Credit for same student

  20. Professor Dorfman’s Observations • Don’t forget life insurance • The credits or educational IRA won’t come close to funding a $50,000+ educational bill. Section 529 plan, if available, looks possible • Investment returns must outpace inflation of college cost’s in early years • Risk needs to be adjusted downwards as the child nears college age

  21. Savings Bonds • Earnings tax deferred (until cashed) from state and federal income tax • Earnings exempt from taxation if used for qualified college expenses by qualified people • Limited to $15,000 (EE bonds) $30,000(I) • No risk, guaranteed return • Financial aid implications: parent’s assets if used for a child

  22. Education IRA • Earnings exempt from federal income tax if used for qualified higher education expenses • Investment limited to $500 each year • Withdrawal penalty if not used for college expenses

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