A recent study found that a bachelor’s degree is estimated to be worth $2.8 million on average over a lifetime, and those who earn one make 84% more than the average high school graduate1. But it’s not just about higher income — our economy is transitioning to knowledge-based workers and jobs that don’t require a degree are beginning to fade away.2 Nearly two-thirds of all jobs in the US — including 18 of the fastest 30 growing professions — require some sort of postsecondary education.3
In 2021, private college on average costs $38,185 a year. Public college costs $22,698 for out-of-state students, and $10,338 for in-state tuition; this does not begin to include the additional fees with housing, books, dining, and more.
Looking at schools just in Los Angeles, we see the cost of attendance below:
- USC: $81,659 (total)
- UCLA: $36,297 (in-state total)
- Cal State Los Angeles: $29,077
- East LA college: $15,261
Where to Start with College Savings
It is key to assess each family’s specific situation and construct a tailored plan accordingly. This involves considering: projected earnings, monthly saving rate, the cost of pre-k through high school education, the number of kids, and any outside sources of assistance.
529 Plans
These are tax-advantaged savings plans specifically designed to help parents pay for their child’s education. 529 plans are not just for college – Federal tax-free withdrawals may also include up to $10,000 per year in tuition expenses for K-12 schools. State tax treatment of K-12 withdrawals varies.
Although contributions are not deductible at the federal level, earnings grow federal tax-free and there is no federal tax on withdrawals to pay for college. Depending on your state, you may be able to deduct contributions from your state taxes.
All 529 plans have a plan manager, usually a financial services firm, that manages the portfolio of investments. You’ll be able to create a portfolio from an offering of mutual funds and ETFs, and tailor it to your time horizon and investment preferences. Both you and your spouse (and anyone else that wants to – it’s not limited to parents) can contribute up to $15,000 per year each and still fall under the gift tax exemption.
You can fund the account with a total of five years’ worth of your annual exclusion gifts, so your child’s 529 can begin with a balance of $75,000.
The key to saving is to do it consistently. Figure out your budget, plan the amount you can invest, and have it automatically deducted from each paycheck.
UGMA/UTMA Brokerage Accounts
These are taxable investment accounts that help adults save and invest money on behalf of a minor, with no contribution limits. The downside is that these accounts do not offer tax benefits at the time the contribution is made or once a withdrawal is executed. Money put into the custodial account is an irrevocable gift and must be invested & used for the minor’s benefit. Further, financial aid can be affected, since the assets are owned by the child. In conclusion, although this is a flexible option to set aside assets for your child, it is not the most efficient vehicle to save for higher education.
Steer Clear of Insurance Policies
Even though the money amassed in a whole or universal life insurance policy is not counted as an asset for financial aid qualification purposes, it is important to avoid them altogether. The premiums are extremely expensive, and they have historically produced mediocre returns over time. Additionally, it can be overly complex, so we generally advise steering clear in most situations.
The Bottom Line
As college costs have increased, students and families have had to become much more proactive and involved in figuring out how to pay for it. But there are options, and the earlier you start the better off you’ll be.
1. Anthony P. Carnevale, et al. “The College Payoff.”
2. Anthony Carnevale, et al. “Recovery: Job Growth and Education Requirements Through 2020.” Georgetown University Center on Education and the Workforce.
3. Ibid.
4. The State of American Higher Education Outcomes in 2019. Third Way.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA