According to the College Board, the average cost of tuition at a public school increased by 6.5% last year. The average increase in tuition at a private school was 4.4%. This put the average cost of tuition, room and board, and fees at $15,213 for the public school and $35,636 for private school.
What can you do about this? Funding a college education can be paid from the following sources:
- Cash flow
- Loans taken out by the parent or child
- Grants or scholarships
- Gifts from grandparents or others
Here we are just going to address savings. What’s the best way to save? Using a 529 College Savings Plan is likely the best option. These plans are funded with after-tax contributions. If they are used for qualifying higher education expenses, then the distributions are income tax free. Parents or grandparents can contribute up to $13,000 per year per beneficiary without having to file a gift tax return. A married couple could contribute up to $26,000 annually without having to file a gift tax return. Also, the IRS allows you to fund five years in one year and elect to treat this contribution as if it was made over the next five years. Therefore, a single person could contribute $65,000 and a married couple could contribute $130,000.
The account is opened and typically funded by the account holder. This is usually the parent or grandparent. Distributions can only be made by this person. Unlike Uniform Gift to Minors Accounts, assets in a 529 Plan do not revert to the child when they attain the age of majority (18 or 21). This control factor is huge for most parents.
What do you need to do? Do some research on the plan offered by your state. You may be entitled to a tax deduction or tax credit depending on where you live. Compare the costs, returns, and options. Visit Joe Hurley at Saving for College at www.savingsforcollege.com to keep up with the latest developments.
ACTION ITEM: If you have to fund a college education, take a hard look at the College Savings 529 Plan. The tax advantages and control of the account with these plans are awesome.
Thomas F. Scanlon, CPA, CFP®