If it seems as though college is getting more expensive every day, that’s because it is. College tuition costs have been going up for the last 100 years, and though it seems as though they couldn’t possibly find a way to go higher, it keeps on happening.
Does going to college cost 10 times more than it did 100 years ago? 100 times? 200 times?
UPenn has archived their tuition costs going back that far, so we can take a look at how the costs have changed to answer that question.
In 1921, the annual cost of tuition at the Wharton undergraduate school was a mere $250.
Fifty years later, in 1971, it had risen to $2350, almost 10 times higher. Another fifty years later, in 2021 it had risen to $53,166, a cost more than 200 times what it was a century earlier!
One might think, that was a lot of money in 1921 compared with what it could buy today. By adjusting for inflation, we can see how much $250 in 1921 dollars could buy in 2021 based on an average basket of goods. Adjusted for inflation according to the U.S. Bureau of Labor Statistics, that would have the purchasing power of $3485.22 today. So even adjusting for inflation, the tuition costs have increased by more than 15 times what they were before.
It’s not just private schools either, public colleges tuition costs have been on the rise faster than inflation as well. Collegeboard.org reports the average cost of tuition for a public college has more than doubled in the last 20 years from $5,260 to $10,560.
Fortunately, there are two tax-advantaged plans to give families a boost as they accumulate capital for meeting education expenses. With each plan, there’s no tax deduction for setting money aside, but taxes are deferred on earnings. Withdrawals used for qualified education expenses, such as tuition and books, are completely tax free.
Coverdell Education Savings Accounts (CESA)
Up to $2,000 per beneficiary per year may be set aside in a Coverdell Education Savings Account (CESA).
One may be the beneficiary of several CESAs, but the total contributions to all such accounts may not exceed $2,000 in one year. Contributions may start when the child is born and continue to age 18. The funds must be drawn down by the time that the child reaches age 30 in order to avoid paying taxes and penalties. Alternatively, a different family member may be named as a successor beneficiary. Funds in a CESA also may be used for K-12 education expenses.
Unfortunately, the donors’ income may restrict them from contributing directly. Singles with adjusted gross income (AGI) of $95,000 and marrieds filing jointly with AGI up to $190,000 are permitted to make full contributions. To avoid this restriction, one could make a gift to the child, who, in turn, could make a contribution to the CESA themselves. Although transfers to a CESA are taxable gifts, they fall well under the $15,000 annual gift tax exclusion. Unless there have been other substantial gifts made in the same year to the same beneficiary, the federal gift tax should not be a concern.
529 college savings programs
There are no income limits as to who may contribute and no age limits on the beneficiaries.
There is no annual limit on the amount that may be contributed to a 529 plan, but the federal gift tax may apply to transfers of more than the annual exclusion from the federal gift tax. That amount is $15,000 in 2021. Married couples can double that, to $30,000. Also, there is an option for accelerating funding, contributing $75,000 in one year and reporting the gift over the next five years. (Married couples could contribute $150,000.) No other taxable gifts are allowed during the five-year period.
Thus, the 529 plan can be an especially good choice for earmarking a lump sum, such as an inheritance, for educational purposes. The amount that may be accumulated for each beneficiary varies from state to state, but it can exceed $200,000. The donor stays in control of the assets in the 529 plan, deciding when withdrawals will be made and for what purpose. If withdrawals are not used for qualified education expenses, income taxes and a 10% penalty tax will be due. Naming other family members as plan beneficiaries avoids this problem.
Every state now offers a 529 plan. You are not obligated to use the plan offered by your home state, but you may secure additional state income tax breaks by doing so. The assets in the 529 plan are managed by a professional investment company or the state treasurer’s office. Generally, the plan will offer a range of investment choices, and if the plan permits, the choice may be changed twice each year.
The Roth IRA option
Although Roth IRAs are intended for retirement, it may be appropriate to look to them as a supplemental source for education funding in some scenarios. Roth IRAs have a higher contribution limit than the Coverdell ESA, and the limit applies on a per donor basis. If the money is needed for education, it is there; if not, it can remain in place for retirement.
Other considerations – Contributions to a Roth IRA may be withdrawn without taxes or penalties. Earnings withdrawn before age 59½ to pay education expenses would be subject to income tax, but no penalty tax would be due.
The most important factor in achieving success in building an adequate college fund is putting time on your side by starting early.
It may be 2021, but it’s not too late to start with the 2020 tax year either. The IRS has postponed the deadlines for filing your taxes this year until May 17th, and that same extension applies to contributions to IRAs, HSAs, and Coverdell accounts. If you haven’t made your contribution yet or want to start an account and contribute for the 2020 tax year, there’s time to do so.
No one can say if tuition costs have peaked, or will continue their meteoric rise. One way to project the costs and estimate the savings needed is to use Arvest Wealth Management’s How Much Do I Need to Save For College Calculator.
This content has been provided by Merrill Anderson and is intended to serve as a general guideline. © 2021 M.A. Co. All rights reserved