As students head back to school this fall, parents would be advised to assess their planning for their biggest future educational expense – college.
Ideally, as parents save for college, they simultaneously will develop a family philosophy with regard to financing higher education – communicating that philosophy to their future student as he or she approaches college age.
Philosophies on funding higher education vary significantly among families and can be influenced by the parents’ own experience with how their college was financed.
Some parents want to pay all tuition and fees; others are willing to pay in-state school fees.
Still others can cover limited costs beyond the student’s financial aid package.
Some can afford to pay all tuition and fees yet believe that their student should have a personal stake in his education – taking out a loan and repaying it himself.
Finally, some choose to help their child repay education debt once she has graduated from college and has joined the workforce.
Regardless of the scenario, students and parents need to be on the same page.
529 REASONS TO OPEN A 529
With regard to college savings vehicles, one that receives much attention is the 529 account.
Legally referred to as a “qualified tuition program,” the account funds must be used for college or other postsecondary training.
Nonqualified withdrawals are subject to income taxes and a 10 percent penalty on the earnings.
A 529 account can be an ideal education savings vehicle because:
< Anyone can establish a 529 and name anyone as a beneficiary, even oneself.
< There are no income restrictions on the owner or beneficiary.
< The annual contribution limit for 2017 is $14,000 per contributor, per beneficiary. The five-year election allows owners to treat contributions as being made ratably over a five-year period for gift tax purposes. A married couple could contribute $140,000 per beneficiary by using this accelerated gift method.
< Distributions for qualified education expenses are tax exempt.
< Although contributions are not deductible at the federal level, some states allow a deduction.
< In Pennsylvania, one can deduct up to the Internal Revenue Service gifting tax limit of $14,000 annually, per beneficiary. Spouses filing jointly must each have income of at least $14,000 to claim the maximum $28,000 deduction. When multiplied by the state’s 3.07 percent income tax rate, the tax savings can make this college savings vehicle very attractive.
< The account can continue to be funded while taking distributions for qualified education expenses.
< If the original beneficiary does not attend college or is awarded a scholarship, the account owner can change the beneficiary.
Another important piece in the college funding puzzle is financial aid. Institutions base their financial aid decisions on the family’s “prior prior year income.”
Those applying for fall 2018 admission will use 2016 tax returns and can submit the Free Application for Federal Student Aid beginning next month on Oct. 1.
Even if a family doubts it will qualify for aid, it may be worthwhile to submit the FAFSA to establish a financial record with the school.
If circumstances were to abruptly change – such as loss of income because of the death of a parent – and a FAFSA is on file, the school may be able to adjust the aid package.
DIRECT FEDERAL LOANS
In addition to tuition grants (money that need not be repaid), the federal government offers direct loans to students and parents. The FAFSA must be filed every year to qualify.
An undergraduate dependent student’s loan may be some combination of subsidized loan – based on financial need, for which interest is forgiven until six months after ending school – and unsubsidized loan. Students may borrow up to $5,500-$7,500 per year based on their college grade level.
Perkins loans are offered to the neediest of students. PLUS loans are available to parents, regardless of income level.
With a shared family philosophy on how to cover costs, an understanding of savings vehicles such as 529s and a completed FAFSA, the opportunity for college-bound students is limitless.
Carrie Fellon is a financial strategist at JoycePayne Partners of Bethlehem and Richmond, Va., responsible for client financial strategy and counsel, comprehensive financial planning and investment management. A Certified Financial Planner Professional and Chartered Retirement Plans Specialist, she can be reached at firstname.lastname@example.org.