Across the U.S. some families have yet to return their young scholars to the classroom, while others may already be well into the new school year. But one day, “back to school” will really mean “off to college.” As a parent (or grandparent), will you be financially prepared for that day?
College is a significant investment in the kids’ futures, in terms of future earnings potential. But its costs can be equally significant. Student debt has doubled since 2008 to more than $1.3 trillion according to the Federal Reserve Bank of New York. The average U.S. private non-profit four year institution charges $45,370 per year in tuition, room and board, a 12 percent increase over the last five years, according to the College Board.
So your entire family—kids, parents and grandparents (plus aunts, uncles and other loved ones, too) —may need to pitch in to meet the high costs of higher education. What roles can everyone play?
Future college students need to understand the cost of their educations and what they can do to help keep the expense manageable. Take advantage of complimentary financial literacy resources available from RBC Wealth Management financial advisors and other financial professionals to learn budgeting and other important skills that will last a lifetime. By taking advanced placement courses or special academic exams, college credits may be able to be earned while still in high school. Spending two years in a local community college before transferring to a four-year school may also result in substantial savings. Plus, scholarships and grants are available from the federal and state government, colleges, and religious and civic groups.
Parents may wish to explore popular college-funding strategies. 529 plan earnings accumulate tax-free, provided they are used for qualified higher education expenses. Some employers offer partial tuition reimbursement or company scholarships. Through a loan or a withdrawal, you may be able to access the cash value of your permanent life insurance policy. Establishing a trust may also be an option, although most trust funds must be reported as an asset when applying for government-sponsored financial aid.
Families often face difficult choices when allocating limited resources to multiple priorities. For example, 49 percent of Americans place greater importance on saving for their children’s education than on saving for their own retirement, according to a 2016 survey commissioned by RBC Wealth Management.
Grandparents can help make it easier for their adult children to build retirement accounts by helping fund the grandchildren’s college expenses. Required minimum distributions from tax-deferred retirement accounts may be a source of funds. Tuition paid directly to a grandchild’s college will avoid the $14,000 annual gift tax exemption, although any gift for your grandchild’s benefit will not offer a chartable income tax deduction.
Grandparents’ contributions to a 529 plan may be a more favorable asset in terms of qualifying for financial aid. And up to $70,000 per beneficiary can be contributed to a 529 plan ($140,000 for married individuals filing jointly) in the first year of a five-year period without incurring any federal gift-tax consequences, provided no additional gifts to the same beneficiary are made during the same period.
By working together, funding a college education is possible. And that may help ALL the scholars in your family earn the type of degree necessary to help them achieve their dreams in life. To learn more about planning for college expenses, contact your RBC Wealth Management financial advisor. Or use the locator tool to find an advisor near you.
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