Preparing for a College Education

By: Grant Soliven,AIF®

With the recent college admissions scandal in the news, it seems some people are willing to risk everything for their child to attend the “right” college.  For the rest of us, let’s talk about saving legally for a college education.  College is expensive, but we don’t want to deny our children the opportunity if their dream is to attend college. It’s an asset that will open doors for them and hopefully give them a more secure financial future. How do you even begin to save for such a daunting expense?

The previous generation grew up with the dream of getting accepted to their preferred university. Today the dream seems to be coming out of school without the crushing debt load that stifles post-collegiate life. According to Student Loan Hero, as of February 2019, we have 44.7 million Americans averaging $34,900 of student debt each, totaling a whopping $1.56 trillion owed. The growth rate of debt has been increasing every year.

Acquiring debt is essentially borrowing from the future to invest in the present. A business may do this by buying a building or equipment. They do it because they believe the investment will outweigh the debt owed in the future. Students are no different. They expect their investment in a college education to pay off in the future by earning a higher income than those who do not further their education. Sometimes this works out, but in other cases it doesn’t.

A college education can set you apart. But, how can you lighten the burden of college debt? 529 plans are a tool parents and grandparents can use to put dollars away to help offset the loan burden. An investment can be made and the earnings grow tax-free if used for higher education expenses. 35 states offer tax incentives for individuals investing for college, and Indiana is one of them if you use the College Choice plan.

The money from your 529 plan can be used for more than tuition. This is important because it gives you the freedom to choose where to use the money, unlike other funding. You can use your 529 account assets for many qualified higher education expenses, including tuition, fees, computers, and in some situations even room and board.

Funding a 529 plan makes sense.  If you use the College Choice plan in Indiana, you can receive a tax credit of up to $1,000 on a $5,000 contribution. That tax credit amount is per household not per beneficiary, so the parents and the grandparents can both get the deduction if both contribute. Although, keep in mind that it is a tax credit. If you don’t owe the state (you could have already paid the tax via withholding out of your paycheck), then the credit isn’t helpful. We suggest that you put in the $5,000 a year when you can. The credit amounts to a 20% return and that is hard to beat in this low rate environment we find ourselves in.

With the 529 plan in place, many of our families will also turn to planning based strategies, outside of just stashing money away. The effective family contribution, or EFC for short, drives the vast majority of education costs for the average middle class family. And because many times families don’t understand they have opportunities to reduce their EFC, they over fund certain buckets of money which leads to them owing more in tuition in the end. With proper utilization of tools like the 529 and even better planning, we help turn choosing colleges from a Herculean task to one of enjoyment and fulfillment.

Note: Investors should consider the investment objective, risks, charges, and expenses associated with 529 plans before investing. More information is available in each issuer’s official statement and applicable prospectuses, which contain this and other information about the investment options, underlying investments and investment company, and should be read carefully before investing.  Also consider whether your state offers a 529 plan that provides residents with favorable state tax benefits and other benefits, such as financial aid, scholarship funds, and protection from creditors.  As with other investments, there are generally fees and expenses associated with participation in a 529 plan.  There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.

Financial Enhancement Group is an SEC Registered Investment Advisor.  Securities offered through World Equity Group, Inc., member FINRA and SIPC a Registered Investment Adviser.  Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group, Inc.  FEG is not owned or controlled by World Equity Group, Inc.