Paying for Post-Secondary Education Expenses


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Discusses college costs, student loans, and college savings plans.

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Paying for Post-Secondary Education Expenses

  1. 1. Paying For Post-SecondaryEducational Expenses: Part 1Barbara O’Neill, Ph.D., CFP®, AFC, CHCRutgers Cooperative
  2. 2. Workshop Objectives Discuss the increasing cost of college Discuss the benefits of post-secondary education Present college cost worksheets and online calculators Explain student loans and loan payoff options Discuss available college savings plans Discuss tax laws relating to college saving and expenses Discuss military and other sources of funding for college
  3. 3. Saving For College orTrade/Vocational School Important financial goal for many families Education is a key to future earning ability and lifestyle• “When we learn more, we often earn more” Youth with savings accounts are more likely to enroll incollege: We Save, We Go to College Youth savings is a strong predictor of college attendance Parents should try to money for educational expenses also 2012 study: #1 college savings vehicle is taxable accounts:
  4. 4. College is Expensive!• College Board Data (“moderate” college budget), 2011-12– Average in-state public college: $21,447 (one year)– Average private college: $42,224 (one year)– Includes tuition, fees, housing, meals, books,supplies, transportation, and personal expenses–• College costs are rising twice as fast as inflation rate!• 2011 Fidelity study: typical family on track to cover only 16% ofcost versus 24% in 2007
  5. 5. College Worksheets and Calculators College Board: FINRA: FinAid: Saving for College: Know Before You Owe (CFPB “shopping sheet”): Rutgers Cooperative Extension Planning Ahead for the Cost of College fact sheet: Financial Planning Association Cost of Education Worksheet: Planning Factors: child’s current age/years to college, annual collegecosts, existing savings, college inflation factors
  6. 6. The Payoff is Usually Worth It Generally, the more you learn, the more you earn but it isbest to learn skills in demand for higher ROI (“good” debt) College, vocational training, trade school, certificate programs College Board Study: Median annual earnings of collegegraduates $21,900 > workers who finished high school Degrees offer protection from unemployment (2009: 4.6%unemployment for college grads versus 9.7% for others) Social benefits: College influences who people meet and marry Better health habits (BUT correlation is not causation!) NY Times Article:
  7. 7. Education-Earnings Relationship
  8. 8. A College Degree is Valuable…Video:Five Ways Ed Pays: Having a College Degree Means a Richer Life in Every Way! Greater Wealth More Security Better Health Closer Family Stronger Community
  9. 9. …But It Depends on What You Study•• “Know [what you will earn] before you go”• Think of college as an “investment”• STEM careers generally have most attractive pay– Science, technology, engineering, math
  10. 10. Realistic Expectations• Think of college as an “investment”– Anything that cuts college costs reduces investment risk– Example: 2 years of community college (2+2 strategy)• Calculate ROI: varies sharply by major, school, financial aid– Wage data:• Consider employment trends in academic choices– Examples: Demand for STEM graduates; geographiclocations• If not college, pursue a vocational/technical education
  11. 11. Key Education Decisions 2 + 2? (community college + 4-year school) 3-1-1? (bachelor’s + master’s degree) Advanced placement courses in high school Choice of major and minor Elite-college degree or not: Is an ivy league university worth$200,000 + of student debt? Work + study ? Research: working > 20 hours per week has negative impact ongrades:
  12. 12. Common College Planning Errors• Procrastination in both saving and decision-making• Expecting a high “guaranteed payoff” for any college degree• Underestimating the total cost• Incorrectly filling out financial aid forms• Not understanding the total cost of student loans• Missing deadlines• Resources:––
  13. 13. College vs. Retirement Savings?• Both goals often compete for limited savings dollars• Retirement savings comes FIRST, especially matched savings– Assets in retirement accounts do not affect child’s financialaid– You can get loans for college but not to retire (except areverse mortgage)• Parents can tap Roth or traditional IRA for college before age59 ½ without penalty• Resources:––
  14. 14. FINRA Publication: Smart Savingfor College-Better Buy Degrees (Web page) of 26-page publication)
  15. 15. FAFSA Form Free Application for Federal Student Aid: Parents and students must refile FAFSA form every year Requires PIN number and tax return data Colleges listed on FAFSA get info electronically Use to get an early estimate offederal student aid Use Net Price Calculator of college/university to determineestimated net cost Cost after grants and scholarships Required by U.S. Department of Education
  16. 16. FAFSA Form Video
  17. 17. Types of Federal Student Loans Subsidized Stafford Loan Fixed rate loan that is need-based Federal government pays the interest that accrueswhile student is enrolled in college + 6 month graceperiod Unsubsidized Stafford Loan Fixed rate loan that is not based on need Interest accrues while student is enrolled in college
  18. 18. More Federal Student Loans Perkins Loan Fixed rate, needs-based, awarded by Financial Aid office Interest does not accrue while student is enrolled incollege + 9 month grace period PLUS Loan for Parents and Graduate Students Fixed rate, credit-based loan Repayment generally begins while student is in college
  19. 19. Paying Off Student Loans Record $28,700 of student debt in 2012 ( $330 monthly payment; need $40,000 salary Consider loan consolidation for easier management: Arrange automatic payments to avoid late fees Federal loan payoff options: Income-based repayment- cap of 15% of discretionaryincome Graduated repayment- smaller payments for first two years Extended repayment (from 10 years to 25 years if >$30,000) Private lenders generally are not as flexible CFBP Student Debt Repayment Assistant:
  20. 20. How Much Money is “Too Much”to Borrow on Student Loans?• Rule of Thumb: Total student loan debt loanshould not exceed starting salary– Earn $35,000, don’t borrow > $35,000• Calculators:
  21. 21. Public Service Loan Forgiveness• Must make 120 separate, qualifying payments after10/1/07 (NOT necessarily 10 consecutive years )• Select a qualifying repayment plan• Be employed in qualifying public service job (e.g.,government, 501(c)(3)s, Peace Corps, Americorps)• Amount of debt forgiven in NOT taxable• Only for Direct Stafford, PLUS, and consolidatedloans (NOT private loans or defaulted loans)• Resource:
  22. 22. Student Loan Debt Crisis Video: Student Loan Debt Crisis (NBC News):$: Time bomb for the American economy set to explode$: Milestone: $1 trillion owed (more debt than on credit cards)$: About $24,000 of debt per student
  23. 23. Tax Credits For CollegeLifetime Learning Credit– Federal tax credit of up to $2,000/taxpayer (20% of expenses up to $10k)– May be received for an unlimited number of years• Particularly helpful for graduate students– Certain income limits apply ($53k-63k:single; $107k-$127k:mfj in 2013)– Must pay qualified education expenses of an eligible student• Self, spouse, or dependent claimed on tax return– Cannot claim Lifetime Learning Credit and American Opportunity TaxCredit by the same student in same year• Can use different credits for different children in college
  24. 24. Tax Credits for CollegeAmerican Opportunity Tax Credit Modified the former Hope Credit; extended through 2017 Provides tax credit of up to $2,500 per student Limited to first four years of postsecondary education Student must be enrolled at least half-time in one academicperiod during the year Certain income limits apply: $80k-$90k: single; $160k-$180k: married filing jointly (2013),,id=213044,00.html (IRS:Tax Benefits for Education)IRS Publication 970:
  25. 25. Qualified Higher EducationExpensesTuition and fees at eligible educational institutionCourse-related booksEquipment/supplies required for students (e.g., knives in aculinary school)Room and board if enrolled at least half time (within limits) Non-Qualifying Expenses: Travel, sports, hobbies (unless required by degree program) Insurance Clerical assistance Equipment not required for attendance in school
  26. 26. Education Tax Credits andDeductionsIRS Video:
  27. 27. Other College Tax Benefits Tuition and fees deduction (deductions reduce income subject to tax) Student loan interest deduction (income limits for both deductions)Resource: Business deduction for work-related education Tax-advantaged college savings plans Tax-free scholarships and fellowships for qualifiededucation expenses
  28. 28. Financial Aid Resources• (The SmartStudent™ Guide to Financial Aid)• (U.S. Department of Education)• (Peterson’s)• (Institute of EducationSciences, National Center for Education Statistics)• (National Association of StudentFinancial Aid administrators)
  29. 29. Three Ways to Pay for CollegeOut-of-pocket from current earningsGood if mortgage/major debt is repaid by child’sfreshman yearStudent loans, scholarships, and grantsCollege savings planslump sum contributionregular savings deposits over time
  30. 30. Five College Savings Vehicles• Section 529 plans• Coverdell Education Savings Accounts– Formerly called “Education IRAs”• Uniform Gifts to Minors Accounts (UGMAs)• U.S. savings bonds• Taxable accounts (unrestricted; no tax benefits)
  31. 31. Section 529 Plans* Named for a section of IRS tax code* Earnings grow tax-deferred; withdrawals tax-free forqualified expenses* Sponsored by state governments Generally don’t need to reside in state to invest in its plan* Many states: managed by investment companies (e.g.,Vanguard in NY, TIAA-CREF in CT, Franklin Templeton in NJ)* Plan features vary from state to state: Contribution limits State tax advantages (often depend on residency) Investment options Fees and expenses
  32. 32. Other Features of 529 Plans• Subject to federally-mandated penalty if withdrawalsare not used for college (nonqualified withdrawals)• 10% of earnings portion; waived due to student’s deathor disability• Substantial amounts can be contributed• Can even “max out” > one state 529 plan• Once-a-year rollovers to another state’s plan arepermitted• Two types of 529 plans– College savings plan: run by state-selected management firm (mostcommon)– Prepaid tuition plan: pay today’s price for future college attendance(run by states and colleges/universities)
  33. 33. 529 Plan Advantages * Donor retains control of the money * Federal and state tax deferral (on plan earnings) * Federal income tax-free withdrawals for qualified expenses * Some states (NY, but not NJ) provide state tax deduction * Can participate regardless of income (no income caps) * High maximum contribution limits (some states: $250k- $300k) * Low minimum monthly contribution limits (some states: $15- $25/month) * The beneficiary can be changed to another family member * Assets in 529 plans are protected from bankruptcy Resources:
  34. 34. 529 Plan Disadvantages * IRS allows only one exchange or reallocation of assets per year * Some state plans have high expenses * Pre-college expenses (grades k-12) are not qualified expenses * Limited menu of investment options * No guarantee that plan will keep up with college cost increases * 10% penalty on plan withdrawals not used for college PLUSpossible recapture of state tax deductions previously taken Resource:
  35. 35. 529 Plan Investments* 529 college savings plans administered by states* Management services provided by financial services firms Examples: TIAA-CREF, Vanguard, T. Rowe Price, Fidelity* Investment choices typically consist of mutual funds* Many plans offer age-based asset allocation options (target date) Portfolio gets more conservative as child gets older* Account balance based on performance of selected investments Resources:
  36. 36. Things to Consider About 529 Plans * Number of years to college * Risk tolerance level of account owner * Minimum and maximum contribution limits * Tax advantages (e.g. state income tax deduction) * Effect on financial aid (parental asset) Could reduce child’s eligibility for need-based financial aid * Expense ratio/fees * Historical performance * Quality of investment manager
  37. 37. “Shopping” Tips for 529 Plans• Investigate account ownership requirements• Select a low-cost plan: expense ratio <1%– Buy directly from a state instead of a broker-dealer• Don’t limit yourself to home state, especially if no state taxdeduction (e.g., NJ + 6 other states have no deduction)–– Perennial “winners”: Alaska, Utah, Virginia, Ohio• Consider an automatic investment plan
  38. 38. Gift Tax Advantage• Donor (e.g., grandparent) can deposit up to $70,000($140,000 from a couple) at one time without incurringfederal gift tax• Treated as 5 installments of $14,000 (2013 gift taxexclusion limit)• Moves money out of estate quickly (pro-rated if donordies in < 5 years)• Helps with “catch-up savings”• Can’t make additional tax-free gifts to beneficiaryduring five year gift-averaging period• Resource:
  39. 39. College Savings Plan Network• CSPN is a non-profit organization comprised ofstate officials seeking to improve 529 collegesavings plans and educate the public about them• Video:• Website:
  40. 40. is a for-profitorganization that educates the public andfinancial advisors about college savings plans(529 plans, Coverdell ESAs, etc).Web site:
  41. 41. Coverdell Education SavingsAccounts (ESAs)$2,000 limit on annual contributions per donee Up from $500 before 2002Covers grade k-12 expenses & post-secondary 529 plans are limited to college expenses onlyIncome limitation for contributions (2013): $95,000 to $110,000 of AGI-single taxpayers $190,000 to $220,000 of AGI- married filing jointlyWithdrawals must be coordinated with Hope andLifelong Learning tax credits (can’t “double dip”)Formerly called “Education IRAs”
  42. 42. Other Features of Coverdell ESAs* Allow investor to choose own investments Versus a limited choice provided for 529s* Provides tax-deferred growth on assets* Withdrawals are tax-free for qualified expenses up to age 30* Accounts can be transferred to relatives* Considered an asset of the parent for financial aid formulas* Cannot be funded once beneficiary turns 18 Resources: (ESA calculator)
  43. 43. Disadvantages of Coverdell ESAs* Low $2,000 annual limit compared to college costs Impractical for large lump sums Account fees can be high % of low savings balance* Age limits: 18 (to contribute) and 30 (to withdraw money)* Some large mutual fund companies do not offer them Have competing 529 plans and/or cite low profit potential Examples: Vanguard and Fidelity
  44. 44. Other ESA DrawbacksContributions to ESAs are not tax deductible to thecontributorMay be fees associated with ESA maintaining accountTaxes and penalties if not used for qualified educationexpensesOrdinary income tax + 10% penalty except deathor disability of beneficiarySavings cannot refund back to parents’ account; mustbe distributed to child if money is left
  45. 45. Uniform Gifts To Minors (a.k.a.,Custodial or UGMA Accounts)* Taxable account: not tax-deferred or tax-free Less attractive than 529 plans and Coverdell ESAs, tax-wise First $1,000 of unearned income is tax-free; next $1,000 taxed atchild’s tax rate: earnings > $2,000 taxed at parent’s rate (2013)* Can impact financial aid: considered as a student’s asset* Cannot change beneficiary (like 529 plans and ESAs)* “UGMA regret”: parents CAN’T legally take back money Child gains control of money at 18 or 21* Can transfer money to other plans or change investmentsonly after cashing out UGMA account and paying taxes
  46. 46. More About Custodial Accounts* Withdrawals are not limited to college Can be used for pre-college educational expenses No penalty if account assets are not used for college* No contribution limit but gift tax rules apply* Once money is transferred to an UGMA account,the donor cannot take it back Resources:
  47. 47. U.S Savings Bonds for College Interest on U.S. savings bonds is tax-free on federalincome tax return if used for qualified higher educationexpenses Income limits (2013) Single: $74,700 to $89,700 phase-out range Married filing jointly: $112,050 to $142,050 phase-out range Dollar amounts refer to adjusted gross income (AGI) Limits apply for year of withdrawal, NOT year of contribution Downside: hard to predict future income Still collect interest on bonds, even if it’s not tax-free
  48. 48. Now Do You See Why TaxableAccounts are the #1 CollegeSavings Vehicle?• More parental control over the invested money• No income limits for saver (e.g., parent)• No maximum savings (contribution) limits• No penalties if child does not go to school• Greater choice of investment options• Less complexity and more flexibility
  49. 49. Other Sources of College Funding* Taxable accounts earmarked for college Earnings taxed as capital gains or at ordinary tax rate* Sale of assets (e.g., real estate)* School and service club scholarships (e.g., Rotary, Kiwanis)* Corporate scholarships* Professional association scholarships* Employee tuition reimbursement programs* Rewards programs (e.g., Upromise, Gerber) Beware of “spending money to save money”
  50. 50. Military Benefits for CollegeTwo programs: Montgomery GI bill and Post 9/11 GI BillPost 9/11 benefits include tuition, $1,000 per year for books andsupplies, and a monthly housing stipend Service member can transfer all or part of benefits to aspouse or child after 6 years of active duty and agreementto serve 4 additional yearsEligible service members can claim benefits for up to 10 years(Montgomery) and 15 years (Post 9/11) after separation fromservice Resources:
  51. 51. eXtension Resources AboutMilitary Family Finances• Blog:• Web Site:– Archived webinars– 500 published FAQs; more in the pipeline– Almost 1,900 FAQs at
  52. 52. eXtension FAQ: EducationalBenefits for Service Membersand Their Families• Montgomery GI Bill• Post-9/11 GI Bill• Military Spouse Career AdvancementAccount (MyCAA) program
  53. 53. eXtension FAQ: Transfer of GIBill Benefits to Spouse or Child
  54. 54. eXtension FAQ:Expiration of GI Benefits “clock” for using benefits starts immediatelyafter a veteran’s last active duty stint of 90consecutive days or more.“Use it or lose it.”
  55. 55. Catch-Up College Saving Strategies* 2 + 2 (first two years at local community college)* Cash-out home refinancing (if low interest rates)* Increase income and/or reduce expenses* End a big debt (e.g., mortgage) by freshman year andpay college expenses from freed-up current income* Ask grandparents for assistance* Last resorts: 401(k) loan, cash value life insurance loan,and home equity lines of credit (HELOCs) Resources:
  56. 56. Financing a Trade School Education* Also known as “Career and Technical Education” Shorter programs of study (1 year vs. 4 years) Focus on career preparation (e.g., electricians, plumbers)* Same access to federal financial aid as college students* Check if trade school accepts federal financial aid If so, fill out a FAFSA form and contact financial aid office Other Resources: Registered apprenticeships Job Corps (U.S. Department of Labor; at-risk youth) Workforce Investment Act training; one-stop career centers Scholarships available outside the institution (e.g., unions)
  57. 57. In Summary* It is easy to calculate savings needed for college* Higher education has economic and other payoffs* The earlier parents start saving for college, the better* Retirement savings trumps college savings if funds are limited* Loans and tax deductions are available for college expenses* College savings vehicles include 529 plans, Coverdell ESAs,UGMA accounts, U.S. savings bonds, and taxable accounts* Viable strategies exist for late college savers
  58. 58. Action Steps* Do one or more college savings calculations* Visit Web sites of specific colleges to investigatetheir costs* Visit student loan Web sites* Adjust W-4 withholding form for expected collegetax write-offs* Start or increase college savings* Visit to learn about 529 plans
  59. 59. Remember, Those Who LearnMore Often Earn More!Resource:
  60. 60. Questions? CommentsExperiences?Part 2 Webinar:Paying For Post-Secondary EducationalExpenses: Part 2(Educational Benefits for Service Members)Please complete the webinar evaluation form