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Education Planning
Over the past decade, college tuition costs have been growing
faster than the rate of inflation. During the past year alone, the average annual
tuition hike at a public university was 3%, and at a private college 5%. As a result,
more and more people are starting education funds while their children are very young. While
investigating investment alternatives for education, make sure that you accurately estimate
college costs, tap into financial aid and other opportunities to offset tuition costs, and
take advantage of tax-advantaged opportunities to invest for education.
How Much Will It Cost?
At the most prestigious universities, a four-year college degree costs a small fortune. An
undergraduate education at Harvard runs about $36,000 a year1! Even if you choose a relatively
inexpensive public university, it's essential to make a plan and start investing now so you'll be
able to help your child or grandchild afford a college education.
As you evaluate how much money you'll need to set aside, think about your time frame:
how many years do you have to invest before your child or grandchild enters college? Next,
estimate the cost of that college education. Right now, the average cost for a year at a public
university is around $11,338, and the average yearly cost for a year at a private college is
$24,9462. Armada’s college planning tools
will be a big help in determining how much you should
be saving.
Financial Aid for Higher Education
Fortunately, financial aid – in the form of student loans, scholarships, work-study
programs and grants – is available to help offset the cost of higher education. Most financial
aid is need-based, so family income, assets, and the number of family members in school or soon
to enter school are considered. Some of the most common forms of financial aid are:
Scholarships
Student Loans & Grants
Work-Study Programs
| Estimated Percentage of Average Public and Private College
Cost Paid for by Financial Aid |
Total
Family
Assets |
Annual Family Pretax Income |
| $30,000 |
$50,000 |
$70,000 |
$90,000 |
| Public |
Private |
Public |
Private |
Public |
Private |
Public |
Private |
| $20,000 |
88% |
94% |
65% |
84% |
7% |
58% |
0% |
36% |
| $40,000 |
87% |
94% |
64% |
84% |
6% |
57% |
0% |
36% |
| $60,000 |
82% |
92% |
55% |
80% |
0% |
52% |
0% |
29% |
| $80,000 |
77% |
90% |
46% |
76% |
0% |
48% |
0% |
27% |
| $100,000 |
71% |
87% |
36% |
71% |
0% |
44% |
0% |
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The percentages shown here are taken from Peterson's Guide to Four-Year
Colleges 2001, and were calculated using the College Board's average, comprehensive public
college cost of $11,338 and private college cost of $24,946 for 2000-2001. Calculations are
based on approximate expected parental contributions toward 2000-2001 college expenses for a
family of four with no other family members in college. Total family assets do not include
home equity.
Scholarships & Grants. Although not restricted by family income,
scholarships are awarded for art, music, athletics, academic accomplishment and a variety of other
reasons. Some scholarships include discounted tuition as part of a preferential package others are
outright grants. Explore your child's options thoroughly as a scholarship could greatly reduce the
amount of money you’ll need to accumulate for education. There are several books available that
describe the scholarships and grants that are available nationally.
Student Loans. Student loans and grants are widely available, but
they do increase the overall cost of attending college, as students must repay both principal and
interest on their loans after they graduate. The earlier you start saving for college, the less your
children may need to borrow.
Work-Study Programs. Universities offer employment opportunities
for students in need of financial assistance. Students receive an hourly wage, which is subsidized
by federal, state or university funds, from work-study employers. The advantage of work-study is
that students can offset some of the expenses of college. The disadvantage is that students are
faced with the challenge of juggling class schedules with work.
Uniform Gift to Minors Act and Uniform Transfer to Minors Act
Why are UGMA and UTMA accounts a tax-advantaged way to save for college? Income tax law
provides that children under the age of 14 do not have to pay federal income tax on a significant
share of their earned income. While there are ceilings on the amount of tax-free earned income a
child can earn in a given year, additional income is usually taxed at the child's low marginal tax
rate. This means that most or all of the income, including dividends, interest and realized capital
gains that your child earns in an UGMA or UTMA is taxed at a lower marginal tax rate than your own. In
some cases, it is not taxed at all.
In addition, each parent and grandparent can contribute up to $11,000 per year to a child's
UGMA or UTMA without having to pay a federal gift tax. However, money contributed to an UGMA or
UTMA is, by law, an irrevocable gift to the child named. In other words, the money belongs to the
child alone when he or she reaches the legal age of adulthood. The donor, or named custodian, simply
serves as the custodian of the assets in the account until the child reaches that age. Consult your
tax advisor for more information about how an UGMA or UTMA may fit into your investment plan.
1 "College Handbook, 2001," The College Board. Estimated total for
undergraduate tuition, student fees, room, board, and personal expenses for the 2000-01academic year.
2 "Trends in College Pricing, 2000," The College Board.
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