With college costs averaging nearly $61,000 a year at private institutions and $46,000 at public schools, paying for higher education is a tall order. Short of hemorrhaging retirement accounts or saddling Muffy with six-figure debt on graduation day, what’s a parent to do?
Start saving now, says Jamie Hunter, a vice president at Fairfield County Bank and financial adviser with Osaic Institutions Inc. in Westport.
“In our area, we want our kids to have a better chance than we did, and we believe college is the way to get there,” says Hunter, who has put his own kids through college and can relate to the challenge. He has watched parents in lower Fairfield County sink every free penny into their homes and retirement accounts, only to come up short at tuition time. Then they raid those very accounts to pay the tuition bill, adding insult to injury. “Your life’s not over after you get the kids through school,” Hunter says.
Saving for college can be a family affair, Hunter suggests, with everyone having skin in the game, from grandparents to the little scholars themselves. Start with a 529 plan. Designed as a tool to pay for school, a 529 lets you invest money in a brokerage account, where it grows tax-free so long as you use the funds to pay for qualified education expenses. Fidelity administers our state’s plan, the Connecticut Higher Education Trust, and contributions are tax-deductible, up to $10,000 per year for joint-filers. Superfunding — or making five years’ worth of contributions at one time — can net joint-filers up to a $50,000 tax deduction in Connecticut.
It costs nothing to set up a CHET account, and there is no contribution minimum. If you open one before Baby’s first birthday, Connecticut will contribute $100 to the cause.
Anybody can open a CHET account, whether a parent, friend or grandparent, and this is where things can get interesting, says Hunter. Account-holders may contribute up to $19,000 a year (or $38,000 for married couples filing jointly) to a 529 without incurring a gift tax, but there is no maximum contribution. Grandparents with a robust nest egg, for example, can superfund Muffy’s 529, combining five years’ worth of contributions in one year ($95,000 for a single contributor or $190,000 for a couple) without incurring a gift tax.
“You can continue to contribute until the account reaches $550,000,” Hunter says, adding, “it’s a legacy plan that’s always in the grantor’s name.” If the original beneficiary of a 529 doesn’t need
the money for school, account-holders can name a new beneficiary.
While a 529 is the most popular savings vehicle for college, Hunter recommends adding a second, less-utilized but very handy tool to the mix: a cash value, whole- life insurance policy. Sure, the primary goal is to pay a benefit upon death, but the policy also accumulates a cash value that can be used for college costs, if necessary. You can even borrow against the cash value — loaning yourself the money if you need it. Another benefit: whole-life insurance is not counted as an asset in federal financial aid considerations.
A Roth IRA account — for Muffy — is a third item in Hunter’s toolbox. Parents, grandparents and kids themselves can contribute 100 percent of the child’s earned income into a custodial Roth IRA, up to $7,500 each year, and have that grow tax-free. Money earned babysitting, cutting lawns, stocking shelves at the store, work in the family business — it all counts as income. Contributions cannot exceed the child’s total earned income, so kids log earnings, as it needs to be verifiable. Come college time, if Muffy doesn’t need that money, it can keep accumulating, tax-free. Muffy will thank you later, when it’s time to pay for her kids’ college.
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One way to shrink college costs is to find a lower price tag to begin with. Connecticut community colleges cost about $5,200 per year, versus about $17,000 for only tuition at UConn. (Tack on another $20,000 or so for room, board and fees.) Going the community college route saves literally tens of thousands of dollars, all while getting those required courses out of the way. Then Muffy can transfer to another school for upper-level classes and the fancy diploma. An added bonus: Connecticut awards community college attendees tuition-free grants to cover a shortfall between federal and state grants received and actual tuition costs. Awards are first-come, first-served, and are not income-restricted. Apply online at CTState.edu/free-tuition.