Paying For Post-Secondary Educational Expenses: Part 1

Barbara O’Neill, Ph.D., CFP®, AFC, CHC Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

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

Saving For College or Trade/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 in college: We Save, We Go to College http://newamerica.net/sites/newamerica.net/files/policydocs/Elliott_III_final1.4.12.pdf

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: http://www.finaid.org/savings/surveys.phtml

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

– http://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064

• College costs are rising twice as fast as inflation rate!

• 2011 Fidelity study: typical family on track to cover only 16% of cost versus 24% in 2007

College Worksheets and Calculators College Board: https://bigfuture.collegeboard.org/pay-for-college/paying-your-

share/college-savings-calculator

FINRA: http://apps.finra.org/Calcs/1/CollegeSavings

FinAid: http://www.finaid.org/calculators/costprojector.phtml

Bankrate.com: http://www.bankrate.com/calculators/college-planning/saving-for-college.aspx.

Saving for College: http://www.savingforcollege.com/college-savings-calculator/

Know Before You Owe (CFPB “shopping sheet”): http://www.consumerfinance.gov/students/knowbeforeyouowe/

Rutgers Cooperative Extension Planning Ahead for the Cost of College fact sheet: http://njaes.rutgers.edu/pubs/publication.asp?pid=FS634

Financial Planning Association Cost of Education Worksheet: http://www.fpanet.org/docs/assets/9BEC9885-F84E-C343-18E612A20F27DFA1/2012FPAEducationWorksheet.pdf

Key Planning Factors: child’s current age/years to college, annual college costs, existing savings, college inflation factors

The Payoff is Usually Worth It Generally, the more you learn, the more you earn but it is

best to learn skills in demand for higher ROI (“good” debt) College, vocational training, trade school, certificate programs

College Board Study: Median annual earnings of college graduates $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: http://www.nytimes.com/2010/09/21/education/21college.html

Education-Earnings Relationship http://www.census.gov/prod/2011pubs/acs-14.pdf

A College Degree is Valuable… Video:

Five Ways Ed Pays: Having a College Degree Means a Richer Life in Every Way!

http://www.youtube.com/watch?v=spNDLD2KRuA

Greater Wealth

More Security

Better Health

Closer Family

Stronger Community

…But It Depends on What You Study

• http://www.youtube.com/watch?v=WvmmGcSVOzo

• “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

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: http://www.bls.gov/bls/blswage.htm

• Consider employment trends in academic choices

– Examples: Demand for STEM graduates; geographic locations

• If not college, pursue a vocational/technical education

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 ? http://www.scholarships.com/resources/campus-life/balancing-work-and-college/ Research: working > 20 hours per week has negative impact on

grades: http://www.insidehighered.com/news/2009/06/08/work

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: – http://www.collegeplanningservices.org/helpful-

hints/common-mistakes.aspx – http://www.actstudent.org/college/mistakes.html

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 financial aid

– You can get loans for college but not to retire (except a reverse mortgage)

• Parents can tap Roth or traditional IRA for college before age 59 ½ without penalty

• Resources: – http://www.savingforcollege.com/tutorial101/tough_choices.php

– http://www.kiplinger.com/columns/drt/archive/2008/dt080910.html

FINRA Publication: Smart Saving for College-Better Buy Degrees

http://www.finra.org/Investors/SmartInvesting/SmartSavingforCollege/ (Web page) http://www.finra.org/web/groups/investors/@inv/@smart/@college/documents/investors/p124094.pdf

(PDF of 26-page publication)

FAFSA Form Free Application for Federal Student Aid: www.fafsa.gov

Parents and students must refile FAFSA form every year

Requires PIN number and tax return data

Colleges listed on FAFSA get info electronically

Use www.fafsa4caster.ed.gov to get an early estimate of federal student aid

Use Net Price Calculator of college/university to determine estimated net cost

Cost after grants and scholarships

Required by U.S. Department of Education

FAFSA Form Video

http://www.youtube.com/watch?v=T7GJ8RQU0_o&feature=topics

Types of Federal Student Loans Subsidized Stafford Loan Fixed rate loan that is need-based Federal government pays the interest that accrues

while student is enrolled in college + 6 month grace period

Unsubsidized Stafford Loan Fixed rate loan that is not based on need Interest accrues while student is enrolled in college

http://www.staffordloan.com/stafford-loan-info/faq/whats-the-difference-between-unsubsidized-and-subsidized-loans.php

More Federal Student Loans Perkins Loan Fixed rate, needs-based, awarded by Financial Aid office

Interest does not accrue while student is enrolled in college + 9 month grace period

http://www2.ed.gov/programs/fpl/index.html

PLUS Loan for Parents and Graduate Students Fixed rate, credit-based loan

Repayment generally begins while student is in college

http://www.parentplusloan.com/

Paying Off Student Loans Record $28,700 of student debt in 2012 (www.finaid.org) $330 monthly payment; need $40,000 salary

Consider loan consolidation for easier management: http://www.loanconsolidation.ed.gov/

Arrange automatic payments to avoid late fees Federal loan payoff options:

Income-based repayment- cap of 15% of discretionary income

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

http://money.cnn.com/2012/05/23/pf/college/debt-repayment.moneymag/index.htm

CFBP Student Debt Repayment Assistant: http://www.consumerfinance.gov/students/repay/

How Much Money is “Too Much” to Borrow on Student Loans?

• Rule of Thumb: Total student loan debt loan should not exceed starting salary – Earn $35,000, don’t borrow > $35,000

• Calculators: http://www.finaid.org/calculators/undergradadvisor.phtml http://calculators.collegetoolkit.com/college-calculators/debttoincome.aspx

Public Service Loan Forgiveness • Must make 120 separate, qualifying payments after

10/1/07 (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 consolidated

loans (NOT private loans or defaulted loans) • Resource: http://www.studentaid.ed.gov/repay-

loans/forgiveness-cancellation/charts/public-service

Student Loan Debt Crisis Video: Student Loan Debt Crisis (NBC News):

http://www.youtube.com/watch?v=4sbBTyxNOMc $: 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

Tax Credits For College Lifetime 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 Tax Credit by the same student in same year

• Can use different credits for different children in college

http://www.irs.gov/Individuals/Education-Credits

http://www.1040.com/federal-taxes/credits/education-credits/

Tax Credits for College American 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 academic

period during the year Certain income limits apply:

$80k-$90k: single; $160k-$180k: married filing jointly (2013)

http://www.irs.gov/newsroom/article/0,,id=213044,00.html (IRS: Tax Benefits for Education) IRS Publication 970: http://www.irs.gov/publications/p970/index.html

Qualified Higher Education Expenses

Tuition and fees at eligible educational institution Course-related books Equipment/supplies required for students (e.g., knives in a culinary 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

Education Tax Credits and Deductions

IRS Video: http://www.youtube.com/watch?v=Apsh5bn3zSA

Other College Tax Benefits Tuition and fees deduction (deductions reduce income subject to tax)

Student loan interest deduction (income limits for both deductions)

Resource: http://www.efile.com/student-tax-deduction-college-education-loan-interest-tuition-fee-deductions/

Business deduction for work-related education

Tax-advantaged college savings plans

Tax-free scholarships and fellowships for qualified education expenses

http://www.collegeanswer.com/paying-for-college/student-loans/student-loan-tax-deduction.aspx

Financial Aid Resources

• www.finaid.org (The SmartStudent™ Guide to Financial Aid)

• www.studentaid.ed.gov (U.S. Department of Education)

• http://www.petersons.com/ (Peterson’s)

• http://nces.ed.gov/collegenavigator/ (Institute of Education Sciences, National Center for Education Statistics)

• http://www.nasfaa.org/ (National Association of Student Financial Aid administrators)

Three Ways to Pay for College Out-of-pocket from current earnings Good if mortgage/major debt is repaid by child’s

freshman year

Student loans, scholarships, and grants College savings plans lump sum contribution regular savings deposits over time

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)

Section 529 Plans * Named for a section of IRS tax code * Earnings grow tax-deferred; withdrawals tax-free for

qualified 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

Other Features of 529 Plans • Subject to federally-mandated penalty if withdrawals

are not used for college (nonqualified withdrawals) • 10% of earnings portion; waived due to student’s death

or disability

• Substantial amounts can be contributed • Can even “max out” > one state 529 plan

• Once-a-year rollovers to another state’s plan are permitted

• Two types of 529 plans – College savings plan: run by state-selected management firm (most

common) – Prepaid tuition plan: pay today’s price for future college attendance

(run by states and colleges/universities)

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: http://www.savingforcollege.com/intro_to_529s/name-the-top-7-benefits-

of-529-plans.php http://www.collegesavings.org/advantagesOf529.aspx

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 PLUS possible recapture of state tax deductions previously taken

Resource: http://www.asktaxguru.com/307-the-advantages-and-

disadvantages-529-education-plans.html

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:

http://www.savingforcollege.com/529_plan_details/ http://www.sec.gov/investor/pubs/intro529.htm

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

“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 tax deduction (e.g., NJ + 6 other states have no deduction)

– http://www.petersons.com/college-search/529-plan-tax-breaks.aspx

– Perennial “winners”: Alaska, Utah, Virginia, Ohio

• Consider an automatic investment plan

Gift Tax Advantage • Donor (e.g., grandparent) can deposit up to $70,000

($140,000 from a couple) at one time without incurring federal gift tax

• Treated as 5 installments of $14,000 (2013 gift tax exclusion limit)

• Moves money out of estate quickly (pro-rated if donor dies in < 5 years)

• Helps with “catch-up savings” • Can’t make additional tax-free gifts to beneficiary

during five year gift-averaging period • Resource:

http://www.finaid.org/savings/gifttaxes.phtml

College Savings Plan Network • CSPN is a non-profit organization comprised of

state officials seeking to improve 529 college savings plans and educate the public about them

• Video: http://www.youtube.com/watch?v=baEVuFgWhak

• Website: http://www.collegesavings.org

savingforcollege.com

Savingforcollege.com is a for-profit organization that educates the public and financial advisors about college savings plans (529 plans, Coverdell ESAs, etc).

Web site: http://www.savingforcollege.com/

Coverdell Education Savings Accounts (ESAs)

$2,000 limit on annual contributions per donee Up from $500 before 2002

Covers grade k-12 expenses & post-secondary 529 plans are limited to college expenses only

Income limitation for contributions (2013): $95,000 to $110,000 of AGI-single taxpayers $190,000 to $220,000 of AGI- married filing jointly

Withdrawals must be coordinated with Hope and Lifelong Learning tax credits (can’t “double dip”) Formerly called “Education IRAs”

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: http://www.savingforcollege.com/intro_to_esas/ http://www.irs.gov/publications/p970/ch07.html http://www.forbes.com/sites/ashleaebeling/2013/01/14/new-tax-law-

resurrects-competitor-to-529-college-savings-plans/ http://www.calcxml.com/calculators/coverdell-esa (ESA calculator)

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

Other ESA Drawbacks Contributions to ESAs are not tax deductible to the contributor

May be fees associated with ESA maintaining account

Taxes and penalties if not used for qualified education expenses

Ordinary income tax + 10% penalty except death or disability of beneficiary

Savings cannot refund back to parents’ account; must be distributed to child if money is left

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 at child’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 investments only after cashing out UGMA account and paying taxes

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: http://www.finaid.org/savings/ugma.phtml

http://www.fairmark.com/custacct/

U.S Savings Bonds for College Interest on U.S. savings bonds is tax-free on federal

income tax return if used for qualified higher education expenses

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

Now Do You See Why Taxable Accounts are the #1 College

Savings 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

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”

Military Benefits for College Two programs: Montgomery GI bill and Post 9/11 GI Bill

Post 9/11 benefits include tuition, $1,000 per year for books and supplies, and a monthly housing stipend

Service member can transfer all or part of benefits to a spouse or child after 6 years of active duty and agreement to serve 4 additional years

Eligible service members can claim benefits for up to 10 years (Montgomery) and 15 years (Post 9/11) after separation from service

Resources: http://www.military.com/education

http://usmilitary.about.com/od/gibillandta/G_I_Bill_and_Tuition_Assistance.htm

http://www.ehow.com/list_6002101_military-college-benefits.html

eXtension Resources About Military Family Finances

• Blog: http://blogs.extension.org/militaryfamilies/

• Web Site: http://www.extension.org/militaryfamilies – Archived webinars – 500 published FAQs; more in the pipeline – Almost 1,900 FAQs at

http://www.extension.org/personal_finance

eXtension FAQ: Educational Benefits for Service Members

and Their Families http://www.extension.org/pages/66646/what-are-the-two-types-of-educational-benefits-for-service-members-andor-their-families

• Montgomery GI Bill • Post-9/11 GI Bill • Military Spouse Career Advancement

Account (MyCAA) program

eXtension FAQ: Transfer of GI Bill Benefits to Spouse or Child

http://www.extension.org/pages/64323/can-a-service-member-transfer-gi-bill-education-benefits-to-a-spouse-andor-children

eXtension FAQ: Expiration of GI Benefits

http://www.extension.org/pages/64169/when-do-gi-bill-education-benefits-expire The “clock” for using benefits starts immediately after a veteran’s last active duty stint of 90 consecutive days or more. “Use it or lose it.”

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 and

pay 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:

http://www.smartaboutmoney.org/LifeEventsFinancialDecisions/EducationandCareers/CollegePlanning/CatchUpStrategies/tabid/375/Default.aspx

http://online.wsj.com/ad/article/lf/SB111150841418086365.html?mod=sponsored_by_lf

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)

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

Action Steps * Do one or more college savings calculations

* Visit Web sites of specific colleges to investigate their costs

* Visit student loan Web sites

* Adjust W-4 withholding form for expected college tax write-offs

* Start or increase college savings

* Visit www.collegesavings.org and www.savingforcollege.com to learn about 529 plans

Remember, Those Who Learn More Often Earn More!

Resource: http://www.bls.gov/emp/ep_chart_001.htm

Questions? Comments Experiences?

Part 2 Webinar: Paying For Post-Secondary Educational Expenses: Part 2 (Educational Benefits for Service Members) Please complete the webinar evaluation form