Qualified tuition programs, 529 College Savings Plans, were created in 1996 as part of the Small Business Jobs Protection Act. The goal is encouraging tax-incentivized savings for future college expenses of a designated beneficiary. The plans are popular with parents and grandparents, particularly as a meaningful baby gift to celebrate a newborn’s arrival.
The 2017 Tax Cuts and Jobs Act expanded uses for 529 Plans. K-12 public, private and religious school tuition was added as a qualified expense. Families may apply up to $10,000 in annual tax-free plan withdrawals to cover elementary and high school tuition. If you do so, the remaining balance will continue to potentially grow and compound ahead of college and/or graduate school costs.
Incentive for saving for education is an admirable idea. But government planning often distorts markets. Make more money broadly available for the purchase of any good or service, and prices generally rise along with demand. Over the last decade, published in-state tuition and fees at public four-year colleges increased at an average rate of 3.1 percent per year in excess of inflation. Private non-public costs rose 2.3 percent over inflation for the same period. The Higher Education Opportunity Act of 2008 made it easier to obtain a government backed loan to finance rising costs. Government guarantees take lenders off the hook for bad loans. Student loans are made irrespective of credit history, of which most students have little. Outstanding student loan debt has ballooned to over $1.4 trillion, and taxpayers are on the hook for an exploding default rate.
An article by Dr. Mark Fisher, “Atlanta Jewish Times” (6/14/19), is instructive regarding college supply/demand curves, noting the “Admit Rate Percent” for select colleges targeted by Atlanta students for fall, 2019, admission. For example, the acceptance rate at Boston U. was 18 percent; Brown, 7 percent; Duke, 7 percent; Emory, 15 percent; Harvard, 4.5 percent; Northwestern, 9 percent; Vanderbilt, 8 percent; Yale, 6% percent. With that level of demand, don’t expect prices to decline!
What do students (parents) actually pay? Rarely published prices and often less than half that. Per Collegeboard.org, for the 2018-19 year, full-time, in-state students at public four-year colleges covered an average of roughly $14,900 in tuition, fees and room and board after grant aid, plus books, supplies and other living expenses. For private colleges the tab was $27,300 per year, often with higher travel and activity fees.
Should you take advantage of the new flexibility to cover some pre-K expenses, especially for costly private schools? The answer depends on family circumstances. If a major breadwinner has a career reverse, layoff or expensive health circumstance, one may welcome the opportunity to pull funds for tuition. But if you can take advantage of potential compounding and the time value of money, and junior and/or Suzie is definite college or graduate school material, you might leave balances to grow.
We have experienced a phenomenal bull market run, and you may wonder when it will end. The informed answer is, “No one knows for sure.” But if you want to take some risk off of the table, “risk” defined as measures of volatility, most 529 portfolio menus have a variety of options. For example, one major 529 manager offers a portfolio for students with 4-7 years until enrollment that is 48.50 percent U.S. and global equities, and 51.50 percent fixed income. For those with 0-3 years before enrollment, the portfolio is more defensive, 25.75 percent equities, 74.25 percent fixed income. For those entering college or now in school, 80 percent fixed income, only 20 percent equities.
For students with longer horizons there’s a 100 percent diversified domestic and international stock portfolio. There is a 100 percent money market option and a 100 percent short-term bond option. Your financial adviser can help sort out the strategy best for you depending on circumstances, expectations, or concerns.
College planning is about more than money. As Dr. Fisher indicated, your life will not “be ruined if you don’t go to an Ivy.” Says he, “The typical students...are not aware of the many other top colleges that exist.” What you do with your one lifetime is a function of God-given talents, your instinctive approach to handling challenge and problem solving. What lights your fire? What do you do naturally when left alone? What are you doing that gets your full attention to the point you lose track of time? Answers to these questions are clues to success and the path to be followed!
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;firstname.lastname@example.org. Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.