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How to pay for the high cost of college
By Denise Dick
In these days of high student-loan debt, rising tuition and decreased state funding for higher education, parents and students planning for a college education face a daunting task, and it can be difficult to know where to begin.
Financial experts say there’s no silver bullet or magic pill, but there are tips to follow to help alleviate the burden.
“There is no rule of thumb, but with college costs increasing faster than inflation, for most parents, the more they can save, the better,” said Scott Schulick, vice president/investments at Stifel in Canfield.
Valerie D’Apolito, a financial adviser at Edward Jones in Boardman, agreed.
“Saving early allows more advantages,” she said. “You should start as soon as you can.”
There are many variables in the cost of higher education, D’Apolito said. Scholarships and grants may be available to help defray college expenses. Some students may choose to live at home, which will cut down on costs, she said.
Both Schulick and D’Apolito referred to the 529 College Savings Plan.
“Investments in such an account grow tax-deferred, and when used to pay for qualified higher-education expenses, the withdrawals are tax- free,” Schulick said.
Qualified expenses include tuition, fees, room and board, books, equipment and supplies.
“Anyone can contribute to the plan — parents, grandparents, other relatives — up to the annual gifting exclusion of $14,000 per year,” he said.
The maximum investment into a plan is $394,000 over time. The plan’s beneficiary can be changed, there’s no limit on deposits because of the beneficiary’s age and no restriction to use the money within a certain time, Schulick said.
“There’s no limit to who can use or how late,” he said.
A person who has a 529 College Savings Plan, but secures sufficient scholarships and grants to pay for an undergraduate education could use the funds in the 529 plan to help finance graduate school, a law degree or medical school.
Because there are no age restrictions, a 529 may be used by someone who either returns to school or goes to school for the first time in middle age.
Schulick said Coverdell Education Savings accounts are another option. Like the 529, these savings accounts provide tax-deferral and tax-free withdrawals, but investments are limited to $2,000 per year.
Another difference is that Coverdell may be used for some kindergarten through 12th-grade education expenses as well as higher education, he said.
Unlike the 529, contributions to Coverdell must be made by age 18 and used by age 30.
“In both plans, if the investments are not used for the qualified education expenses, the withdrawals are subject to federal and state income taxes plus a 10 percent penalty,” Schulick said.
For parents who may not have started planning as early as they could have, D’Apolito said her firm works with families to help them look for alternatives and “see if the child is eligible for scholarships and how they can work it into their budget to at least partially pay for” their children’s education. She said she encourages parents and students to use their school guidance counselors to help direct them to schools that may have available funding based on talents and skills of the particular student.
“I encourage them to plan early and to seek the advice of a professional so they can have a plan that will be successful for them,” D’Apolito said.