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The cost and rewards of college
As the tables show, the rewards of a higher education outweigh the cost.
| The cost1 | ||
| College expenses are expected to more than double by 2021. | ||
| Age of child | private | public |
| newborn | $362,425 | $151,420 |
| 3 yrs. | $306,897 | $128,221 |
| 6 yrs. | $259,877 | $108,576 |
| 9 yrs. | $220,061 | $91,941 |
| 12 yrs. | $186,345 | $77,855 |
| 15 yrs. | $157,795 | $65,926 |
| 17 yrs. | $141,235 | $59,008 |
| The rewards2 | |
| The rewards of a higher education can make it all worthwhile. | |
| Education level | Mean annual earnings |
| Not a high school grad | $21,600 |
| High school grad | $30,800 |
| Bachelor's | $49,900 |
| Master's | $59,500 |
| Ph.D. | $79,400 |
| Professional (business, law, medicine) | $95,700 |
1 Source: MFS calculations based on data from College Board's Trends in College Pricing 2005, using tuition & fees and room & board. Calculations assume college costs will increase by 5.7% per year on average in all categories. For illustrative purposes only.
2 Source: "Median Earnings and Tax Payments by Level of Education, 2003." Table in Trends in Higher Education Series 2005 (collegeboard.com).
College Education Funding Options:
529 College Savings Plans
One of the key features of 529 college savings plans is tax advantages.
- Earnings and withdrawals for qualified higher education expenses are tax deferred. (Nonqualified withdrawals are subject to both income taxes and a 10% federal tax penalty. Qualified withdrawals are tax free as long as they are used for higher education expenses.
- As much as $12,000 ($24,000 for married couples) can be contributed each year without gift-tax consequences.
- Under a special election, up to $60,000 ($120,000 for married couples) can be contributed at one time by accelerating five years' worth of investments. This feature makes it an attractive estate planning tool for many. Account owner will not incur federal gift taxes as long as he/she does not make any additional gifts to the same designated beneficiary for four years after the year during which he/she makes the one-time gift.
Education IRAs
Anyone - parent, grandparent, relative, or family friend - can establish an Education IRA account. Single tax filers with incomes up to $95,000, as well as married couples who file jointly with incomes up to $190,000, can contribute the full $2,000 per child each year. Education IRAs are also referred to as Coverdell Education Savings Accounts.
Tax advantages and features
The earnings from an Education IRA accumulate tax free. There is no tax on the earnings when the money is withdrawn for qualified education expenses such as tuition, room and board, books, and supplies. Earnings withdrawn for purposes other than educational expenses are subject to income tax and a 10% federal tax penalty. Other restrictions may apply.
Elementary through college education costs
You can use an Education IRA to pay for a child's elementary through college education expenses.
Flexibility and control of assets
- The person who establishes the account in the name of a child retains control over the assets.
- You can name a successor: On the Education IRA application, the owner can name a successor to take control of the assets should he or she pass away.
You can roll over an account into a new education IRA: The money in the account must be spent or paid to the beneficiary by his or her 30th birthday. However, the account may be rolled over into a new education IRA for a family member of the original beneficiary.
Matthew O. Henderson is a Registered Representative of and offers securities and investment advisory services through MML Investors Services, Inc., 1 Leadership Square, 211 N. Robinson, Ste. 1400, Oklahoma City, OK 73102 (405) 270-8000. Henderson Financial Group, Inc., Henderson Benefits Group, Inc., Henderson Golf, Inc., Henderson Business Consulting, LLC, Henderson Wealth Management, LLC is not a subsidiary or affiliate of MML Investors Services, Inc.
