College tuition costs are increasing faster than the combined rising prices of gas, milk, postage, rent and other costs of living.
Over a decade, published tuition and fees at public four-year colleges and universities nationally grew nearly 6 percent a year above inflation, as measured by the Consumer Price Index, the College Board recently reported.
“A lot of parents are going to have a rude awakening when it comes to paying the tuition bill,” said Niall Bridgeman, a financial adviser and principal of Bridgeman Wealth Management, based in Egg Harbor Township. “I think parents know they need to save for it. A lot of parents aren’t in the position to do it because of the economy.”
One way for parents and grandparents to save for a child’s education is through 529 plans.
In New Jersey, there is no tax deduction for contributing to the plans, although money grows tax-free if used for qualified educational expenses such as tuition, books and required supplies and equipment.
Residents do not have to stick to a New Jersey-based plan and can shop around through other states or investment firms such as Vanguard.
There are benefits and pitfalls to 529s, local financial and accounting professionals say.
Savings in 529 plans tailed off after the start of the recession but have picked up since 2009, according to a May 2011 report by Boston-based Financial Research Corp. Contributions increased more than 35 percent annually in those two years, the company reported.
Bridgeman, who has a 529 set up for his 5-year-old son, said he has seen steady demand for 529s, particularly for their flexibility and control.
Frank Thomas, a professor of accounting and finance at The Richard Stockton College of New Jersey, said funds can be shifted among family members.
“Like a lot of planning tools, it’s important and definitely a worthwhile consideration,” Thomas said.
Unlike states such as Pennsylvania and Virginia, 529 plans in New Jersey lack a tax deduction, although the issue has been raised. A bill in the Legislature to allow income-tax deductions for the program died by pocket veto in January.
The state Office of Legislative Services in January 2011 estimated allowing income-tax deductions for the NJBEST 529 plan in New Jersey would cost at least $6.3 million in tax revenue in fiscal year 2012 and would increase as the economy improved.
New Jersey plans, however, offer a bonus of as much as $1,500 for those attending a New Jersey institution, Thomas said. That bonus may add a wrinkle to the college selection process.
“It kind of adds an undue influence to the decision on what college to go to. It’s a feature that has its benefits but also has its drawbacks,” Thomas said.
Those who have 529 plans should consider not only how to contribute to them but when to draw from them.
For example, emptying a 529 account to pay for an entire year of college may disqualify taxpayers from certain credits, including the American Opportunity Tax Credit and the Lifetime Learning Tax Credit, Thomas said.
“What the payer should think about is, if we don’t have enough in the 529 for four years, rather than pay 100 percent (one year), it may be better paying some money out of pocket,” he said.
“You can shoot yourself in the foot. Let’s say you had a child and the first year costs are $30,000 and you take it all out of the 529 plan. That’s great, but maybe if you paid some money out of pocket you would have gotten the American Opportunity Credit,” Thomas said.
There are other drawbacks.
An unqualified withdrawal will bring taxes and penalties, Bridgeman said.
And a significant amount of money in a 529 plan can affect a child’s financial aid opportunities, Bridgeman said.
People should also consider fees associated with 529 plans. High fees can take a chunk out of savings, he said.
Thomas said mutual funds should be more conservative the closer the child gets to college. This was a lesson some learned the hard way several years ago when stock-heavy portfolios tanked shortly before some children neared college age.
“It is very important for the parents to think about how those funds are allocated between safe and unsafe investments,” Thomas said. “I see too many contributors to the 529 plan think, ‘My child is 5 years old, 100 percent in stocks makes a lot of sense because we won’t be using the money for 12 years.’ And they forget to change the mix. And then what happens is what happened in 2007, and the value of their portfolio is cut in half.”
“The earlier you put the money away the better. It might pay to be a little more aggressive when the child is young, but ease back on that stock throttle as they get older,” he said.
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