Answers to Common Education Savings Questions

By Carrie Gallaway, CFP®

It’s that time of year, college students are back on campus, high school students got their new lockers, and elementary school kids are settling into the new routine. A new school year is upon us.

As the parent of a new 6th grader, I was recently struck by the fact that my daughter only has two first days of school before she’s off to high school. After that thought, I promptly realized that she only has six first days of school before college.

When she was born, I repeatedly heard that the days would be long but the years would be short. Wow, is that ever true.

Thinking about the passage of time coupled with the start of the school year highlights how important it is to create a plan for saving for your child or grandchild’s education.

I’ve heard many people say they will think about college savings later, but saving for education isn’t something to put on the back burner. Time is on your side when it comes to investing and saving. More time creates the opportunity for compounding and growth.

However, even if you know you should be saving for college, it can be difficult to start saving and continue saving if you have questions or you don’t have a clear strategy or plan.

Recently, we helped a client implement a college savings strategy for his newborn son. After the last meeting, the client shared that he was thankful we were able to clearly answer his questions and create a strategy that he understood; otherwise, he wouldn’t have done anything.

Below is a list of common questions I receive about education planning. If after reading this list, you have more questions or want to discuss creating your own education plan, please call to schedule a time to discuss your personal needs.

Every family has it’s own financial and personal considerations that must be factored into any investment and savings plan, and with professional guidance, it is possible.

Question #1: 

Do I need to save for my child’s college education, isn’t there a good chance she could receive a scholarship? 

The reality is that only 2% of high school athletes1 receive scholarships to play a college sport and only a small portion of college costs are covered by the scholarship (1). The average athletic scholarship for the most popular sports averages $5000-$7000 yearly, which is only enough to pay a small portion of total college costs (2).

Question #2: 

If my child receives a scholarship for college, what happens to the money invested and saved in a 529 plan? 

The money in the 529 Plan is not lost. If a student earns a scholarship, the family can either transfer the unused 529 plan assets to another family member, keep the money invested for future education such as an advanced degree, or withdraw the amount equal to the scholarship without paying the 10% federal penalty tax.

Question #3: 

What happens if my child receives a merit based scholarship or free grant? 

Only 0.3% of college students receive enough grants and scholarships to cover the total cost of college (3). The reality is that during the 2017-18 academic year, 57% of families received merit based scholarships averaging only $7,760 (4), which only covers a portion of college costs.

Question #4: 

Will the cost of college go down at some point in the future? 

No one can predict college costs in the future. Over the last ten years, college costs have increased at 3.1% annually for public colleges and 2.3% for private colleges (5). It is unlikely that college costs will decrease.

Question #5: 

I have money saved in a bank savings account and make contributions monthly; won’t that money be enough to cover college costs? 

The average cost today of one year of a public college is $21,400 and $48,500 for a private college (6), but in 18 years, that cost could easily be double. With bank savings accounts and CDs paying historically low interest rates, many families may not meet their college saving goals. It is important to understand all the college savings options in order to maximize growth and tax savings.

Question #6: 

Can I use money in a 529 account to pay for grade K-12 tuition? 

Yes, The Tax Act and Jobs Act (TCJA) of December 2017 allows for federal tax-free withdrawals of up to $10,000 annually per student on money used for qualified education expenses. However, New York state (and some other states) have not conformed to the new federal rule and a distribution for K-12 tuition may require a recapture of state tax deductions or credits. We recommend consulting with a tax or financial advisor for more information.

Question #7: 

Why do I need to save now? I’ll pay for college from my current income when my child goes to school. 

It is impossible to predict one’s income in the future. Long term planning and saving over multiple years or even decades allows your money to growth through investments and work most efficiently for you. A 529 account may allow you to spend less out of pocket by investing now.

As seen in the below example from JPMorgan, 529 accounts benefit everyone. By investing more, you pay less out of pocket. For example, the amount needed to pay tuition for four years of private college for a newborn in 18 years could be $503,186. Whereas if you start saving yearly in a 529 account today, the annual savings in investments would only total $276,476 out of your pocket. A lump-sum investment today would require even less out-of-pocket. The long-term growth and favorable tax status utilized in a 529 Plan means you pay less out of your own pocket for college.

Carrie Gallaway, CFP®, CeFT®, is a Financial Advisor with over 20 years of industry experience. She is a principal at YorkBridge Wealth Partners, an independent wealth management firm. Carrie is also the author of the bestselling book, Your Money, Your Life and a Hoboken resident for 18 years (photo by Marie Papp).

 

 

 

 

 

Endnotes:

1. National Collegiate Athletic Association (NCAA), March 2018
2. Scholarshipstats.com, for National Collegiate Athletic Association (NCAA), National Association of Intercollegiate Athletics (NAIA), junior colleges and community colleges. All data for the 2017-18 school year.
3. Finaid.org Based on full time student at four year colleges.
4. Sally Mae, How America Saves for College, 2018
5. Trends.collegeboard.org, Average Rates of Growth of Published Charges by Decade
6. The College Board, 2018 Trends in College Pricing 

The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.