I was recently having a chat with my uncle (who currently has two kids in college) and my grandparents regarding the seemingly sky-rocketing costs of college these days. In particular, we were discussing the amount my grandparents paid in tuition versus what students pay today. TheCollegeBoard.org offers great research on this subject. Here’s a chart that shows some of their findings:
While this chart doesn’t quite go back in time far enough to when my grandparents were in college, it still gives us a pretty good idea of just how quickly tuition is increasing. TheCollegeBoard.org estimates that the historical inflation for the cost of college has typically been in the 5-8% range, although there have been several years when it’s been higher than 8%. To help put this in perspective, SavingForCollege.com projects tuition and fees for new parents and their children as follows:
|Type of Institution||Projected 4-Year Tuition and Fees|
|Today (Enrolling 2012)||In 18 Years (Enrolling 2030)|
|Public/University (in-state resident)||$37,800||$108,100|
|2 Years Community College & 2 Yeas Private College||$73,700||$210,400|
*Assuming 6% annual increase
Fortunately, there are some steps you can take ahead of time to lessen the financial blow of sending your kids to college. Here are three savings vehicles that offer tax benefits in saving for college:
Qualified Tuition Programs (529 plans)—Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs.
Coverdell Education Savings Accounts— Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs. ESAs may also be withdrawn tax-free for primary and secondary school expenses.
U.S. Savings Bonds—EE and I bonds purchased after 1989 by someone at least 24 years old may be redeemed tax-free when the bond owners, their spouses, or dependents pay for college tuition and fees. In 2013, the tax exclusion is phased out for incomes between $74,700 and $89,700 (between $112,050 and $142,050 for married taxpayers filing jointly).
If you are currently in school or have dependents who are currently in school there are other tax incentives that may help with college expenses including the American Opportunity Tax Credit, Lifetime Learning Credit, above-the-line deduction for tuition and fees, and the student-loan interest deduction. Be sure to check with your tax advisor to see if you qualify for any of these incentives.
Just remember that it is always best to plan ahead and save whenever possible and within reason. I’ve never heard anyone say that they wish they hadn’t saved so much or planned for their financial future!