Planning for College After COVID

The COVID pandemic has changed the habits and routines of countless individuals. For many, the pandemic has altered the way they interact with others and even made an impact on their spending habits. Through all the haze, college planning is still on the forefront of many investors’ minds, and COVID has changed parents’ sentiments of college. Parents are more concerned about their children’s safety and health and now want their kids to enroll at a college closer to home. A recent survey of Florida families shows that more than 90% of parents believe a college education is just as important or more important in the wake of the pandemic.

Accordingly, JP Morgan recently released the results of their 2021 study entitled “College Planning Essentials: A comprehensive guide to saving and investing.” Below are some highlights from the study, including the value of a college degree, the current cost of college, various ways families save for education, and more.

A common question about the cost of college, “Is the price worth it?” Answers to this question vary and may not have the same meaning from one family to the next. To some, college is a “no exceptions” policy. For others, it might be a “wait-and-see” scenario. Without question, more families are doing a cost-benefit analysis when it comes to attending college.

As mentioned in the study, the average annual earnings by educational degree are as follows:

High school graduate – $39,371

Bachelor’s degree – $73,163

Professional degree – $152,703

This emphasizes the point that a college education can still be valuable in today’s society, despite the potentially large cost.

One of the main questions about college planning is, “How much will we need to save?”  It is an important question, as college is one of the largest expenses many families face. The answer can vary based on a wide variety of factors, such as where your child attends school, whether it is a public or private institution, in-state versus out-of-state, and more.

The current average four-year cost per the study is:

Public institution – $95,599

Private institution – $218,825

“2+2” community college – $57,858

While these figures might be tough to digest, there are methods to reducing the cost of college. For example, the above costs show the cost savings of attending a community college for two years, then transferring to a public institution for the remaining two years. Based on these figures, this “2+2” approach reduces the cost by almost 40% compared to a public institution.

So, how do parents pay for college? Most families are paying through personal savings and borrowing. There are avenues to help cover some of these costs, such as free grants and scholarships, but research shows they only cover about 26% of the overall tuition. That means the remainder must be made up by the families themselves and/or student loans.

Just like any other goal, creating a reasonable plan of action and staying disciplined to achieve the desired outcome is key to success. The same is true for college planning. Any amount of consistent, regular contributions is beneficial in the long-term.

There are several savings vehicles people can use to accumulate money for education. Although the most known plan is a 529 education account, the most common form of college savings is cash (savings, checking, etc.). However, cash is very unlikely to obtain the growth needed to pay for college. For reference, college tuition (tuition inflation) is currently rising at twice the inflation rate.

There are many benefits to using a 529 college savings account. For one, it receives tax-free growth and tax-free withdrawals if used for qualified education expenses. Another benefit is the ability for a contributor to remove assets from their estate. There is a gifting rule (“Super funding”) which allows an individual to make up to five years of tax-free gifts in a single year (i.e., up to $75,000 in 2021), per beneficiary. This makes a 529 plan a great avenue to lower the value of an estate and make an investment in the higher education of a loved one.

If you are interested in having a more in-depth conversation about college planning, we would be more than happy to schedule a meeting with you. We are here to help you navigate through the uncertainty.

The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.

Adam Howard

Author

Adam Howard