College Funding Strategies

Does the endlessly rising cost of college tuition keep you up at night? Strategies for funding higher education are never far from any parent’s mind.

The College Board published results from its annual survey of public and private four-year colleges and universities.  For years 2013-2014, the survey reports annual tuition costs ranging from $8,893 (public institutions) to $30,094 (private nonprofit institutions).  After factoring the additional costs such as room and board, the total cost rises from $18,391 (public institutions) to $40,917 (private nonprofit institutions) per year.  What's more alarming is that the 2.9% increase in tuition seen in years 2013-2014 is the smallest percentage increase in over 30 years.  Higher education is expensive, and tuition costs are not projected to decrease any time soon.

The good news is that there are some tax-advantaged options to achieve savings for college.  The Investment Plan and the Guaranteed Savings Plan are both offered by Pennsylvania.  Similar plans are also sponsored by other states, but may not necessarily offer the same advantages.  The Pennsylvania-sponsored plans include the following benefits:

  • Pennsylvania state tax deduction for contributions of up to $14,000 per beneficiary per year (provided that the contributor has at least $14,000 in Pennsylvania-taxable income).
  • No adjusted gross income (AGI) limitations are placed on the contributor.
  • Investors can choose from 13 investment options, with low fees and enrollment costs.
  • The plan assets grow tax-free, and withdrawals from the plan are exempt from federal and Pennsylvania state income tax provided the withdrawals are used for qualified expenses. Some qualified expenses include tuition, room and board, books and supplies, fees and other expenses.
  • Parents, grandparents, friends, aunts and uncles can contribute to the plan.
  • Pennsylvania plan assets are sheltered from Pennsylvania creditors.
  • Plan accounts are transferrable among beneficiary children or even to the parents.
  • Pennsylvania 529 plans are not included in determining state financial aid eligibility.
  • The entire value of the plan is exempt from Pennsylvania inheritance tax.
  • Federal gift tax consequences can be avoided by electing the contribution of annual gift exclusion to be prorated over five years.  For example, grandparents can make a one-time gift of $140,000 to a grandchild's 529 plan ($14,000 annual gift x 5 years x 2 grandparents) with no federal gift tax consequences.  A gift tax return would still need to be filed; however, the gift would not reduce the grandparents' lifetime exclusion amount.

With the rising costs of tuition and related fees, it's never too early to start planning.

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