By Kortney Christensen, CFP®,Vice President, Manager, Private Client Services
A recent Pew Research Center study found that four in 10 of U.S. households headed by someone under the age of 40 have student debt – that’s the highest ever. The median level is approximately $13,000. Not surprisingly, the drag on household net worth is significant. For those households headed by someone under 40 with debt, household net worth is $8,700, according to the study, versus $64,700 for the same group without student debt.
As a result, many parents and grandparents help their children and grandchildren with education costs and that assistance is becoming more and more critical. Let’s spend a few minutes considering the benefits of planning for and assisting your loved ones with college costs. Whether you do it through a 529 plan or another savings vehicle, why should you consider helping a loved one with college costs? Here are five reasons:
- College isn’t getting any cheaper. Can you recall the price when you went to college? Well, if you went to college 20 years or more years ago, be prepared for sticker shock at today’s prices. Maybe you were enterprising enough to have had a job while attending school and paid for your education that way. Unfortunately, wages haven’t increased at the same rate as college costs, so that college job won’t put as much of a dent in the tuition as it did in the past. While a typical family income has increased by 147% since 1982, the cost of a college education has increased nearly 500% since 1985. (Forbes article, 3/24/2012, College Costs Out of Control). Scholarships are wonderful, but are not guaranteed and the competition for them is considerable. Counting on your child getting a scholarship can backfire on you if that is your college planning strategy.
- If students attend college without help, they often accumulate substantial debt. As college costs rise, students are taking on more debt and consequently, having trouble paying it off. As I mentioned in a recent blog, the overall level of student debt is very high. According to a study by the Institute for College Access and Success, 71% of graduates in 2012 had student loan debt. As of 2012, the average student loan balance for all age groups is around $24,000, per American Student Assistance. This debt can be very difficult for young graduates to manage and many struggle to keep up with debt payments.
- Alternatively, if students don’t obtain a college degree, they are hurting their future earning potential. According to a Pew Research Center survey, college graduates ages 25-32 earn around $17,500 more than those with a high school diploma. Additionally, these same college graduates are 7% more likely to be full-time employed and 8% less likely to be unemployed. In this increasingly competitive job market where many employees change jobs numerous times over their career; the flexibility, training, career assistance and alumni networks that colleges offer can give graduates a competitive edge.
- Education is a powerful gift. Beyond the benefits of a college degree that I mentioned above, if you are planning on leaving your family a legacy, why not consider making part of that gift while you are still living? Assisting a loved one with education fosters independence, spurs curiosity and expands their horizons. Plus, you get the benefit of watching them use it. You can set aside funds early to create a potentially larger pool of education dollars in the future, or you can make direct payments to the college for the tuition. Keep in mind that direct gifts to a college for tuition are not taxable gifts and therefore would not affect your annual or lifetime gift exclusions.
- The IRS is on your side. There are many different ways to give, some more tax efficient than others. If you can afford to set aside funds now, use one of these tax-efficient vehicles such as a 529 or Coverdell Education Savings Account (ESA) that provide tax-free withdrawals for education expenses. By starting early, the funds will have a chance to grow into a larger pool of savings and offset a larger chunk of education costs. Both 529 Plans and ESAs offer tax-deferred growth and any qualified distribution will be income tax free.
Whether you decide to help pay for a small portion of college, or foot the entire bill, know that you are making a significant impact on helping your student reach financial independence.