College Planning Essentials
College is one of life’s most important—and expensive—investment goals. How much will it cost? What can you expect from financial aid? And how can you invest and earn more while borrowing less?
We use select pages from College Planning Essentials to answer these questions and provide five time-tested strategies for successful investing. Together with guidance from your financial advisor, it can help you make more informed decisions and the most of your college funds.
UNDERSTAND THE COSTS
Start your plan with a college funding goalThe first step toward meeting college costs is knowing what they are. Costs are high today and will likely be even higher when your children attend college, thanks to annual tuition inflation that is outpacing the overall cost of living.1
Use this chart to estimate future costs and begin creating your investment plan. Simply find a child’s current age to see projected four-year costs at both public and private universities.
Next, work with your financial advisor to determine how much you plan to pay and how much might come from financial aid, family gifts, student income and other funding sources.
For a 6-year-old, total costs are expected to be about $170,000 at a four-year public college and $386,000 for a private college.
1 J.P. Morgan Asset Management, College Planning Essentials 2019-2020 Edition, Tuition inflation, page 7.
KNOW WHAT TO EXPECT FROM FINANCIAL AID
Many families expect more free financial aid than they are likely to receive
Fewer than two-thirds of all students actually get grants and scholarships, and only 0.3% receive enough for a free ride to college.
Even if your child qualifies, grants pay an average of only 12% of the costs at a four-year public university, while scholarships cover just 15%.
To make up the difference, families need an investment plan that can help them achieve their goals without taking out expensive loans or ruling out schools based solely on cost.
Don’t let financial aid stop you from investing
It’s a common myth that investing for college will hurt your chances for financial aid. The fact is, family income counts much more than assets in the formula for awarding federal aid.
This chart can help you estimate your Expected Family Contribution (EFC) used to determine federal financial aid eligibility. In calculating EFC, the Department of Education considers up to 47% of parents’ income but only a maximum of 5.64% of their assets—even those in a 529 plan earmarked specifically for college.
HOW TO USE THIS CHART:
Find the box where your combined income intersects with the value of all assets except your primary home and retirement accounts. The result is your estimated Expected Family Contribution.
DON’T JUST SAVE, INVEST
1Strategic Insight, 529 Industry Analysis: 2019.
Don’t count on cash
The most commonly used college funding vehicles are savings accounts, checking accounts and CDs that have normally underperformed tuition inflation.1 Instead of just saving, investing that cash gives families the higher return potential needed to grow college funds and keep pace with rising costs.
Invest in a diversified portfolioThe key to staying invested for the long term is avoiding large portfolio fluctuations over the short term. Because stocks and bonds tend to rise and fall at different times, owning both may help you smooth out investment returns and stay on course toward college funding goals.
This chart shows that a diversified portfolio has historically outpaced bond returns and tuition inflation, with lower volatility than stocks.
KEEP COLLEGE AND RETIREMENT ACCOUNTS SEPARATE
Avoid using retirement funds for collegeWithdrawing money for college can jeopardize your retirement security. For example, this chart shows that taking out $25,000 to fund college now could mean $80,000 less for retirement in 20 years, due to lost investment earnings and compounding.
Spending retirement money on college may also result in taxes, penalties and reduced financial aid. Because withdrawals are considered student income, half of the amount you take out may count against your federal aid package.
Consider opening dedicated accounts just for college, such as 529 plans, which offer special tax benefits not available in retirement accounts.
MAKE THE MOST OF TAX-ADVANTAGED 529 PLANS
Maximize special gift and estate tax benefits
529 plans allow five years of tax-free gifts in a single year—up to $75,000 per child from individuals and $150,000 from married couples.2
A lump-sum gift at birth may be enough to pay nearly all four years of projected costs at a public or private college, as shown in the chart.
All 529 plan gifts and investment earnings are removed from the contributor’s estate without losing control over the assets. This can help grandparents, aunts, uncles and others invest for college while also reducing estate taxes, increasing inheritances and creating family legacies.
1 Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Federal law allows distributions for tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private or religious school (“K-12 Tuition Expenses”) of up to $10,000 per beneficiary per year. Under New York State law, distributions for K-12 Tuition Expenses will be considered non-qualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions.
2 No additional gifts can be made to the same beneficiary over a five-year period. If the donor does not survive the five years, a portion of the gift is returned to the taxable estate.