Most people understand the value of a great education and a college degree. However, they also know just how fast college costs have been rising. Since 1985, the average cost of a college degree has risen over 500%, according to Forbes Magazine. The cost of college has become so burdensome for parents that it requires years of saving.
We encourage our clients to begin college planning immediately after the birth of their children. There are multiple college savings programs that offer tax-free growth, so the earlier you begin saving, the larger the ultimate benefit.
There are several factors that go into the college funding calculation:
Two other considerations for parents: how much, if any, of their children’s college expense do they plan to cover and the impact of a scholarship on their savings plan.
Both of these assumptions should be considered and built into the projection. Accounting for all of these items will allow us to generate a thorough estimation of how much money should be saved, and is needed, for college.
The college savings plan that we utilize most frequently is the 529 plan. This plan allows for parents to contribute to an account which they own, with the child as the beneficiary. All contributions are invested and grow tax-free if used for college education expenses. In addition, certain states such as Maryland will offer an additional incentive to parents for savings for college: income tax deduction. For Maryland residents, each parent can deduct up to $2,500 of contributions on their Maryland state income tax return. Therefore, we typically set up two 529 plans, one for each parent. This allows our clients to receive a tax deduction of up to $5,000 for contributions into their child’s college account.
Planning for college has become one of the most common financial planning topics for our clients. We assist in building a projection to determine how much they will need to contribute monthly, annually, or as a one-time lump sum. In addition, we will aid in the investment management of their college accounts to ensure maximum tax-free growth of the funds. Automatic monthly contributions from a checking account to a 529 plan have become very common for parents. This allows parents to consistently hit their contribution targets in a streamlined manner.
College costs can’t continue to skyrocket as they have over the years. Cost controls on salaries, as well as changes in policies such as teacher tenure, are already being implemented. In addition, internet based learning is growing in ease and popularity. However, the cost of an education will always be a major budget item for most parents. Start planning now – we can help!