Education – The Gift that Keeps on Giving
Reinforcing the Value of College Savings for Future Generations
The economic landscape of the U.S. has shifted considerably over the past 30 years. As the U.S. has steadily lost our comparative advantage as a manufacturing powerhouse (largely due to automation and inexpensive overseas labor), high-skilled service positions have emerged as the greatest opportunity for gainful employment in the 21st century.
Fortunately, the job market has been thriving for the past several years. The October 2018 BLS report found that the national unemployment rate is 3.7% – the lowest level since 1969. In October alone, 250,000 jobs were added. While strong job creation trends are encouraging, the new openings will increasingly demand that workers possess a strong educational background.
A Georgetown University report projected that there will be 55 million jobs created in the U.S. economy through 2020. Of these job opportunities, 24 million openings will be newly created, whereas 31 million openings will result from Baby Boomer retirements.
About two-thirds of these job openings will require higher education: 35% of the jobs will require prospective employees to earn a bachelor’s or graduate degree, and 30% will demand an associate’s degree or some college.
As a result of these employment trends, enrollment in American colleges and universities has reached an all-time high, with a projected student enrollment of 19.9 million students in fall 2018 (a 23% increase in enrollment since fall 2000).
Without question, the need for postsecondary education has never been more vital to achieving success in your career. To gain a competitive edge in today’s workplace, younger generations must embrace some form of training or education beyond a high school diploma.
Figures 1 and 2. As job openings for high-school-educated workers have sharply declined since the 1980s – and especially since the Great Recession – employees with Bachelor’s degree or other college experience have seen expanded job opportunities.
Demand for Higher Education Drives Skyrocketing Costs
As employers have continued to embrace a college-educated workforce over the past 30 years, the cost of college tuition and fees has risen dramatically. According to the College Board, the cost of a four-year degree from a public college or university has tripled since 1988 (when adjusting for inflation).
During the same timeframe, the inflation-adjusted cost of earning an associate’s degree or a four-year degree from a private college has doubled (see figure 3).
Even within the past 10 years, the expenses associated with college have steadily increased – not only for tuition and fees but also for room and board, books, supplies and other expenses (see figure 4).
An analysis by the College Board found that the average tuition and fees for public, in-state, four-year institutions have increased by 3.1% annually between 2008 and 2018 (adjusted for inflation).
The cost of attending a private college or university has followed a similar trend; in the past year alone, their average tuition and fees rose by 3.3% (before adjusting for inflation).
Contact your CAS advisor for a personalized estimate on future college expenses for your child or grandchild.
Figure 3. Tuition and fees for postsecondary education have skyrocketed since 1988, and the upward trajectory continues to hold steady.
Figure 4. The cost of attending a four-year college – including associated expenses like room/board and books – ranges from about $25,000 to $52,000 per year (before financial aid and scholarships are applied).
About 529 Plans – An Ideal Vehicle for Education Savings
While there are many ways to save for college, 529 plans are widely considered to be the “gold standard” for building financial preparedness throughout your child or grandchild’s college experience.
How does it work?
A 529 plan can be established with a principal as small as $250. Each 529 plan is controlled by an owner (usually a parent or grandparent) who has discretion over the investments and the beneficiary listed. The beneficiary on a 529 account may be changed at any time based on the needs of your family.
When the account is established, you may elect to make monthly, quarterly or annual contributions. You should also ensure that a contingent owner is named on the account, in the event that the main owner is no longer able to manage the 529 plan.
Best of all, the earnings within a 529 account are exempt from federal taxes. As long as the funds are used towards qualified educational expenses – tuition and fees, books and supplies, room and board, and computers or other equipment – you will never pay taxes on the gains.
In addition, while contributions to the 529 plan are not deductible at the federal level, many states do offer a tax credit or deduction on your state income taxes (see figure 5 for details).
New for 2018: Funds from a 529 plan can now be used to pay tuition at private K-12 schools as well (annual limit of $10,000 in distributions per child).
What are the limitations?
Once the account is established, anyone can contribute to the 529 plan. It is not restricted to contributions from the owner only. For instance, if you have multiple family members that want to provide financial support for a child’s educational pursuits, you can all deposit into the one account.
An individual may gift up to $15,000/year per beneficiary ($30,000 annually for married couples) without gift tax consequences.
Exception: The “five-year rule” for 529 plans allows you to make a one-time, lump-sum contribution while bundling five years’ worth of annual exclusions. In other words, an individual may provide an initial contribution of up to $75,000 to the 529 plan ($150,000 for married couples). If you elect to go this route, a gift tax return (709) does need to be filed for informational purposes only; no gift tax will be due.
The five-year rule allows you to start out with a larger principal and potentially build more gains over time. However, you may not contribute any additional funds to the account during the next five years.
Our team would be happy to discuss the optimal strategy for establishing and funding 529 plans based on your family’s unique situation.
Figure 5. Many states offer tax incentives for families who contribute to their child or grandchild’s 529 plan.
Make it Personal – Strategies for Gifting Education to Family
Each year around the holidays, my niece Victoria would receive an abundance of gifts from her parents, grandparents and great-grandparents. Like many families, we would spend every Christmas morning opening the gifts, and then spend the next week figuring out where to put them all!
When Victoria was five years old, I decided to take an unconventional approach to her holiday gifts. Instead of purchasing the latest tech gadget or a new outfit, I established a 529 plan and named her as the beneficiary (of course, I still have a small wrapped gift for her under the tree!).
I started making monthly contributions to the plan; and at the end of each year, we review the statement together and talk about her dreams for the future. As with most young children, her career aspirations are always changing over time – from a veterinarian, to a teacher, to her latest desire to be the next pop superstar!
Our annual discussions about her future are a fun and easy way to connect with her. These holiday meetings provide a great opportunity to help Victoria learn more about money, education and the importance of savings. Every year, she asks me more questions and builds on her foundation of practical knowledge.
Most importantly, I feel confident that whatever path she chooses after high school, my family and I will be there to support her dreams.
Our team has also created “529 gift certificates” on behalf of clients who have been funding an account for a family member. These certificates are a fun and visually appealing way to announce the educational savings to your child or grandchild and provide a tangible reminder of your commitment to their future success. Ask your advisor for more details about our certificates.
Given the importance of higher education in attaining a successful career – and the astronomical cost of today’s college experience – the need to start saving early and often has never been more crucial.
A 529 plan provides you with a tax-advantaged means of empowering your child or grandchild to pursue their educational aspirations, while also reducing their potential student loan debt burden. In addition, a 529 plan can serve as an excellent way to teach young people about the importance of consistent saving and the value of their future collegiate endeavors.
Simply put, 529 plans are the gift that keeps on giving!