I love my kids. I really miss them now that both boys are away at college. I must also confess that Abby and I have adjusted surprisingly well to the “empty nest”. With the kids at school, we have found more time for ourselves including taking a yoga class at the local Park and rec department. Additionally food shopping has become much easier and less expensive, there’s less laundry and less dishes, the house stays cleaner, and Abby is free to use her Stop and Shop gas points for HER car!
After 33 years of helping parents with college planning (this month starts my 34th year in the financial planning business), I can now say I have real-life first-hand experience with this. My experience tells me what most of you already know: college costs are skyrocketing. According to The College Board, a non-profit research and advocacy organization, the average cost for tuition, fees, room and board, books and personal expenses was about $24,000 per year last year for in-state students at a public college. The average cost for out-of-state students at a public college was $33,000. The average private college cost was approximately $45,000 with many private schools costing more than $60,000 per year.
By contrast, a two year community college averaged $3,435 per year. In Connecticut, all credits earned at a community college in the Connecticut State and University College System can matriculate to four year colleges in the system.
I wish I could tell you the secret for paying for your children’s college. The truth is there is no magic bullet. Paying for college will typically include a combination of strategies including:
- Savings: 529 plans, possibly Roth IRA’s and custodial accounts
- Financial Aid: both merit and needs based
- Loans: taken out by parents and by students
- Current Income: from students working during school or on semester break as well as parents redirecting current income or forgoing/delaying purchases during college years.
According to the Fidelity College Savings Indicator Survey, the top regrets of parents with students at least in 10th grade are:
- They wish they had saved more each month
- They wish they had opened a 529 account sooner
- They wish they had treated contributions to a college fund like a monthly bill
- They wish they had boosted savings by 1% every year
- They wish they had prioritized college savings over impulse buys.
So the simple advice for most on college planning is to use a 529 account AND save as much as you can to cover the expected costs.
Now let me offer advice about withdrawing money from 529 plans. To receive tax-free withdrawals, the distributions must NOT exceed the adjusted Qualified Higher Educational Expense (or QHEE). QHEE include room and board, tuition and fees, books and supplies, and any school-related special services or requirements. You must then deduct any costs already covered by tax-free education assistance including: Pell grants, tax-free scholarships and fellowships, tuition discounts, Veteran’s educational programs, and tax-free employer educational assistance programs. You also need to deduct the cost you may have used to claim and American Opportunity Tax Credit or Lifetime Learning Credit. I can appreciate the desire to double up on the tax benefits for the same college expenses but the IRS won’t allow it.
Please note the “Q” in QHEE. Not all expenses qualify. Besides beer, other expenses not qualifying for tax-free withdrawals are the cost of off-campus housing in excess of the actual amount charged for housing operated by the college. Also your student must be enrolled at least half-time for these expenses to qualify.
Textbook costs are qualified BUT only if required by the course. This is not an insignificant cost as according to The College Board, the 2014-15 average cost for required books and supplies was $1200 per year. The same goes for computers and related equipment and services. They are qualified expenses if considered required for educational purposes. If in doubt the college’s financial aid office should be able to give guidance. Remember for those expenses not considered qualified, the earnings portion of the distributions will be taxed as ordinary income and could incur a 10% tax penalty.
Keep good records. This advice shouldn’t be too hard to follow as colleges provide regular bills for their expenses. But keep track of room and board for students in off-campus housing as well as books and equipment which are not included on the college’s bill. Also, please build in time for us to process your 529 distribution request. Some investment companies are better at processing requests quickly than others.
I wish you all a wonderful upcoming holiday season. I truly look forward to having my empty-nest being filled with family and friends. I know I’ll enjoy having Jon and Mike home with all the extra mess, extra noise, extra laundry, extra food costs, and extra love that will come with them.
