COLLEGE SAVINGS 101

Savingforcollege.com

Did college just get less expensive?
http://www.savingforcollege.com/articles/did-college-just-get-less-expensive

Posted: 2013-10-24

by Joseph Hurley

Financial Professional Content

The College Board this week released its annual report "Trends in College Pricing" containing data that suggests college tuition inflation may be slowing. This is good news for your clients concerned about funding future college costs for their children and grandchildren. And it may, in fact, get them more interested in using 529 plans, for reasons I describe below.

Here's a little more background. Published tuition and fee schedules at public 4-year institutions rose only 2.9% between last school year (2012-13) and this school year (2013-14). This figure compares to an increase of 4.5% between 2011-12 and 2012-13, and an increase of 8.5% for the year prior to that.

A similar trend was found in other institutional categories. At private 4-year colleges the comparable figures (starting with 2013-14 and going backwards) are 3.8%, 4.0%, and 4.2%, and at 2-year public colleges they are 3.5%, 6.1%, and 8.4%.

Using data from the College Board, we have computed the seven-year average annual increase in tuition and fees to be 5.2% when averaged out across the three institutional categories (4-yr public, 4-year private, and 2-year public).

College cost projections are less intimidating

Some parents fail to start saving for college simply because the task seems so impossible. Why go through sacrifice for an effort that will inevitably fail to produce enough money? "We'll just have to make the hard decisions when the time comes," they say.

If the slowdown in college price inflation is a long-term trend, savings goals change dramatically, and may appear more achievable to parents, who will in turn be willing to make a greater effort to begin saving.

We recently reduced the college cost inflation "default" assumption on our college cost calculator from 6% to 5%. This slight adjustment drops the future 4-year cost for today's newborn by about $53,000, from $312,000 to $259,000. The monthly savings goal to cover 100% of that projected cost is reduced from $674 to $561.

Of course, the updated figures will still be intimidating to many parents. That's why you should be encouraging a coverage target much lower than 100%. Shooting for 25% coverage lowers the monthly savings goal to the more digestible figure of $140.

The College Board reminds us that most students do not pay anything close to the tuition sticker price. In fact, the "net price" paid by the average 4-year private college student for 2013-14 is $12,460 after grants and federal tax benefits, or about 41% of the $30,094 average sticker.

Financial aid is unreliable

Who knows how many financial aid dollars will be available in the future, or what any particular student will have to do to establish eligibility for such aid? Federal and state aid programs will change over time, as will the ability of institutions to afford to give out scholarships and other types of tuition discounts.

The College Board, to illustrate this fact, finds a general downward trend in grant aid occurring.

The safest bet remains having funds saved up to pay for college, which means greater use of 529 plans. Choice of institution is also a major consideration. After all, parents should want to send their child to the school that is best for that child, and not necessarily the one that offers the biggest financial aid package.

The tax benefits of a 529 plan are not tied to college costs

If college costs increase by 5% annually, and your 529 account appreciates by 7% annually, you get to exclude the entire 7% annual growth, provided that distributions from the 529 plan do not exceed the student's adjusted qualified higher education expenses.

Most people don't fully appreciate this benefit. Congress could have attempted to cap the tax exclusion by limiting it to college cost inflation. But they didn't. No one can predict if we are in an era where investment returns will outdistance college inflation, but if we are, then 529 plans are where you want to have your college funds invested.

Financial Professional Content

The College Board this week released its annual report "Trends in College Pricing" containing data that suggests college tuition inflation may be slowing. This is good news for your clients concerned about funding future college costs for their children and grandchildren. And it may, in fact, get them more interested in using 529 plans, for reasons I describe below.

Here's a little more background. Published tuition and fee schedules at public 4-year institutions rose only 2.9% between last school year (2012-13) and this school year (2013-14). This figure compares to an increase of 4.5% between 2011-12 and 2012-13, and an increase of 8.5% for the year prior to that.

A similar trend was found in other institutional categories. At private 4-year colleges the comparable figures (starting with 2013-14 and going backwards) are 3.8%, 4.0%, and 4.2%, and at 2-year public colleges they are 3.5%, 6.1%, and 8.4%.

Using data from the College Board, we have computed the seven-year average annual increase in tuition and fees to be 5.2% when averaged out across the three institutional categories (4-yr public, 4-year private, and 2-year public).

College cost projections are less intimidating

Some parents fail to start saving for college simply because the task seems so impossible. Why go through sacrifice for an effort that will inevitably fail to produce enough money? "We'll just have to make the hard decisions when the time comes," they say.

If the slowdown in college price inflation is a long-term trend, savings goals change dramatically, and may appear more achievable to parents, who will in turn be willing to make a greater effort to begin saving.

We recently reduced the college cost inflation "default" assumption on our college cost calculator from 6% to 5%. This slight adjustment drops the future 4-year cost for today's newborn by about $53,000, from $312,000 to $259,000. The monthly savings goal to cover 100% of that projected cost is reduced from $674 to $561.

Of course, the updated figures will still be intimidating to many parents. That's why you should be encouraging a coverage target much lower than 100%. Shooting for 25% coverage lowers the monthly savings goal to the more digestible figure of $140.

The College Board reminds us that most students do not pay anything close to the tuition sticker price. In fact, the "net price" paid by the average 4-year private college student for 2013-14 is $12,460 after grants and federal tax benefits, or about 41% of the $30,094 average sticker.

Financial aid is unreliable

Who knows how many financial aid dollars will be available in the future, or what any particular student will have to do to establish eligibility for such aid? Federal and state aid programs will change over time, as will the ability of institutions to afford to give out scholarships and other types of tuition discounts.

The College Board, to illustrate this fact, finds a general downward trend in grant aid occurring.

The safest bet remains having funds saved up to pay for college, which means greater use of 529 plans. Choice of institution is also a major consideration. After all, parents should want to send their child to the school that is best for that child, and not necessarily the one that offers the biggest financial aid package.

The tax benefits of a 529 plan are not tied to college costs

If college costs increase by 5% annually, and your 529 account appreciates by 7% annually, you get to exclude the entire 7% annual growth, provided that distributions from the 529 plan do not exceed the student's adjusted qualified higher education expenses.

Most people don't fully appreciate this benefit. Congress could have attempted to cap the tax exclusion by limiting it to college cost inflation. But they didn't. No one can predict if we are in an era where investment returns will outdistance college inflation, but if we are, then 529 plans are where you want to have your college funds invested.

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