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Today's Lesson on Tomorrow's Legacy

Jeremy Altfeder, CFP®
CAPTRUST Senior Client Management Consultant | Client Services

As a young boy, unbeknownst to me, it was commonplace for grandparents to stash large bills in the centerfold of their wallet for an “unexpected occasion.” I am reminded of my first-generation-American grandfather saying to me in his baritone Lower East Side accent, “Kid, my wish for your father was to open his billfold and pull out a $50 bill for his son, and that when you become a father, you reach into your pocket and pull out a $100 bill for yours.” Having a child of my own now, I have begun to grasp the message behind my grandfather’s altruistic quip so eloquently delivered several decades ago: every generation wishes that the following generation may live a more prosperous and endowed life than theirs.

In recent years, it has become more common for grandparents and parents to provide financial support for college education as a way to help ensure tomorrow’s legacy, with 67 percent of grandparents saving or planning to save to help future college-bound grandchildren, according to research from Legg Mason Global Asset Management.1 Sixty-one percent of parents have a financial plan in place, according to Fidelity Investments; however, only 37 percent of the 61 percent of parents with a plan are utilizing a dedicated college savings vehicle.2 In this article we provide information on the challenges of college funding and options available to assist in saving for the next generation’s future education.

According to a report released in 2011 from the Center on Education and the Workforce at Georgetown University, over a lifetime, a graduate with a bachelor’s degree can expect to earn 84 percent more than a colleague with only a high-school diploma. Further, master’s degree recipients on average earn 26 percent higher salaries than those who hold only bachelor’s degrees. These differences are even more exaggerated when specific occupations are considered; the gap is much larger for degrees in engineering, business, healthcare, and computer science.3

Though the financial incentives are apparent, the cost to achieve these degrees is rising quickly. During the first ten years of the millennium, the National Center for Education Statistics (NCES) found that the average cost for a public undergraduate degree rose an inflation-adjusted 40 percent.4 As an example, the cost of undergraduate tuition and fees at the University of North Carolina at Chapel Hill in the 2002-2003 school year was $3,856; for the 2012-2013 school year it was $7,690, an inflation-adjusted increase of more than 58 percent.5 Although the cost is substantially higher to attend private colleges, the rate of tuition increase over the same time period has not been as dramatic. At Duke University, for example, tuition and fees for 2012-2013 are $45,620, up from $29,345 for the 2003-2004 school year — an inflation-adjusted 15 percent increase.6,7

In addition to rising tuition and fees, the overall cost to complete a degree is increasing as students are taking longer to finish their degrees. According to the NCES, only 60 percent of students complete their degrees in less than six years, and slightly over half of first-time students finish their degrees “on time”— within four years.8 This not only creates an additional complication for families contributing to a loved one’s education, but it also can create challenges depending on the type of vehicle used for savings. Considering the significant challenges of rising costs and increased time spent in college, it is now more important than ever for families to establish a plan to save for higher education.

Parents and grandparents interested in establishing a college savings plan have a number of options available to them — each with its own set of pros, cons, and considerations related to state and federal taxes, contribution levels, eligibility, and expense qualification. Options include:

529 College Savings Plan. 529 plans are state-sponsored, tax-advantaged savings vehicles to be used specifically for qualified higher-education expenses.

Coverdell Education Savings Account (ESA). ESAs are tax-advantaged savings vehicles that can be used to fund qualified K-12 and higher-education expenses. Income limits apply.

UTMA/UGMA custodial accounts. Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) custodial accounts are often, but not expressly, used for college savings, and irrevocably transfer assets into a child’s name. Account ownership transfers to the child once he or she reaches the age of majority.

Qualifying U.S. savings bonds. Series EE (issued after 1989) and Series I Savings Bonds may be used to fund qualified higher-education expenses.

After-tax savings. General-purpose, after-tax savings are often used to fund college expenses in addition to the more tax-efficient savings options above.

A well-organized education savings plan may utilize one or more of these college savings options. For example, pairing a 529 plan with after-tax savings is a commonly used method. The 529 plan can take care of the lion’s share of qualified higher-education expenses — such as tuition, fees, books, and room and board — with after-tax savings stepping in to meet other needs while the student is in college. This approach provides an effective blend of tax benefits and flexibility.

The thought has crossed my mind that my grandfather’s wish for my generation has become a reality, albeit not exactly the way he envisioned. Rather than pulling a $100 bill out of my wallet, perhaps the fulfillment of his wish is his grandson opening his great-grandson’s 529 account statement and watching the balance grow. These tax-advantaged dollars set aside for college will undoubtedly help provide my son the opportunity to achieve a more prosperous and endowed life than my generation. That is a legacy I would like to see fulfilled.

Should you need assistance creating a savings plan for your children or grandchildren’s education, CAPTRUST is here to help. Please contact your financial advisor for more information. 

Sources:

1 “Joining Forces: The Smart Way to Help Grandparents Fulfill College Dreams,” Legg Mason Global Asset Management, 2014
2 "College Savings Report Card: Parents Give Themselves a B-Minus When It Comes to Saving for College,” Fidelity Investments, August 21, 2013, http://www.fidelity.com/inside-fidelity/individual-investing/college-savings-report-card
3 Anthony P. Carnevale, Jeff Strohl, and Michelle Melton, “What’s It Worth? The Economic Value of College Majors,” Georgetown University Center on Education and the Workforce, May 24, 2011, https://georgetown.app.box.com/s/5bgczqc0nefsx68bj4u4
4 “Fast Facts: Tuition Costs of Colleges and Universities,” National Center for Education Statistics, accessed July 20, 2014, http://nces.ed.gov/fastfacts/display.asp?id=76
5 Finance Division University of North Carolina at Chapel Hill, “Prior Academic Year Rates and Important Dates,” accessed June 20, 2014, http://finance.unc.edu/saur/student-account-services/tuition-and-fees/#Prior_Year
6 Duke University Office of the Provost Institutional Research, “Tuition by school over time,” accessed June 20, 2014, http://ir.provost.duke.edu/facts/tuitionandfinaid/tuition%20history%20through%200910.pdf
7 “Higher Education Price Index, 2002-2012,” Independent School Management, June 30, 2013, http://isminc.com/research/general/highereducationpriceindex2012pdf
8 “Fast Facts: Graduation Rates,” National Center Education Statistics, accessed July 20,2014, http://nces.ed.gov/fastfacts/display.asp?id=40