Author: Brian Kurrus, CFP®
The new school year is a perfect time to review your education needs, funding and planning for potential college expenses as well as undergrad private tuition expenses if applicable.
Education Needs
Evaluate current costs, trends and how much if any you wish to cover. Annual total cost of attendance expenses could range from $25k – $75k+ depending on if the university is public or private, in-state or out of state. Specific costs and trends can be evaluated through websites like collegeboard.org or by researching specific universities you wish to consider.
Next estimate how much these could increase each year. While we saw high annual tuition increases for several decades, this has declined in recent years. Other expenses such as room & board, meal plans and supplies are more closely tied to overall inflation. While the Federal Reserve has maintained a long-term target inflation rate of 2%, I recommend considering the impact if total costs increase from 2-4% annually.
If contributing towards these costs you may choose to just set aside what you can, cover a percentage of total costs or fully fund your child’s education if possible. College savings calculators can assist in estimating what these costs may look like down the road and how much you may need to adjust funding to meet your goals.
Education Funding
The 529 savings plans are a popular way to save for education expenses. The 529 plans are funded with after-tax dollars; however, many states offer a state tax deduction for using their state sponsored plan and some states provide a deduction regardless of which plan is used. I recommend reviewing your state options if you are considering opening an account.
While getting a deduction for new contributions is great, the real value is getting tax-deferred growth over a long period of time. All investment earnings are tax-deferred and can be pulled out tax-free for qualified education expenses. This includes tuition, room & board and other expenses at the college level while funds can also be used for K-12 tuition, capped at $10k/year.
If funds are withdrawn for non-qualified education expenses, earnings are taxed as ordinary income with a 10% penalty. Secure Act 2.0 added a new feature for 529 plans, allowing up to $35k of unused assets to be rolled over to a Roth IRA for the beneficiary over time once the account has been open for 15 years.
There are other account options for funding college education such as UGMA/UTMA accounts, qualified US savings bonds, Coverdell ESAs and traditional savings accounts which may provide more flexibility how the funds are used; however, they do not offer the same level of investment with tax-deferred growth potential as 529 plans in most instances.
FAFSA, Student Aid and Federal Loans
Completing the FAFSA (Free Application for Federal Student Aid) is needed to determine eligibility for Federal student financial aid. It qualifies one for Federal grants, loans and work-study programs. The 2024/2025 FAFSA season began after December 2023 with a Federal deadline of June 30, 2025.
Grants, scholarships and loans can play a key role in funding college education costs. Grant programs disburse funds that can be applied to tuition, housing, books and other expenses. A scholarship is an award of financial aid often based on athletic, academic or merit-based criteria.
Federal loans can be subsidized, unsubsidized or PLUS with fixed rates and different criteria for each. There are various types of loan forgiveness plans that could ultimately be available as needed. Private education loans are options for additional assistance but may carry higher rates with less forgiveness opportunities.
Summary
Each step plays an important role in the education planning process. Start early by evaluating potential costs and considering your funding options. If saving for college, a 529 plan is a great way to achieve tax-deferred growth while putting money aside towards future expenses. Once eligible submit the FAFSA as early as possible to maximize your options and consider Federal loans to cover shortfalls as needed. While education funding can seem like a daunting task, it’s much more manageable when you break down the process and start early!
Brian Kurrus, CFP® specializes in working with families and small business owners; his mission is to provide his clients with a diverse range of wealth management ideas and solutions. His specific areas of focus are estate conservation, business succession strategies, retirement funding, long-term care issues, life insurance, and disability income insurance. Brian is an instructor for NITP.
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