Since it’s back-to-school time across the U.S., let’s take a look at education as it relates to family wealth planning. For many families, investing in a college education—and even private schools from as early as kindergarten—is simply part of family tradition. But other families aspire to sending the first ever in theirfamily off to college—and borrowing significantly to do so.
But whatever the situation, families need to consider the long-term impact of education costs and how decisions might affect their retirement planning and even gifting plans.
Generational Education and Wealth
BenjaminFranklin, who gave us such gems of financial wisdom as “A penny saved is apenny earned,” also said, “An investment in knowledge pays the best interest.” This is exactly what we’re thinking, too, when we use the phrase “investing forgenerations.” A good education doesn’t ensure personal prosperity, but it can certainly increase one’s “luck” at becoming self-sufficient and potentially even wealthy. And when managed correctly, this same “luck” can be passed on to future generations.
Since parents, and sometimes grandparents, usually try to fund the younger generation’s educations, it’s important to understand how things such as 529 education plans, tax-free gifting, and even student loan considerations can make funding educations an integral part of overall financial planning.
Rising Tuitions and Rates
In the ten years from the 2010-2011 school year to the 2020-2021 school year, the average cost of tuition and fees for a private nonprofit four-year college rose from $31,700 to $37,600.1 In fact, college tuition in some years has risen at twice the rate of inflation, but that was back in the “good old days” of low inflation rates.2 The more direct result of the recent rise of inflation is seen in the increase in federal college loan interest rates (from 3.73% to 4.99% for undergraduate loans and from 5.28% to 6.54% for graduate loans, according to the United States Treasury.) Fixed-rate private student loans are immune to this increase, but typically higher than federal loans anyway. Which brings us to the somewhat touchy subject of student loans.
Student Loan Forgiveness Update
Taken together, students are facing $1.75 trillion in loan debt. This ranges from averages of $89,000 and above for undergraduates to medical school debts well over $300,000.3 And this is likely on top of huge amounts of creditc ard debt. This represents a significant burden on students, their families, and the economy in general. One goal of loan forgiveness is for students who would otherwise have opted for jobs outside their wheelhouse to be more likely to enter their chosen field—possibly years earlier than if they were still saddled with debt.
Here’s aquick look at the most recent government plan for student loan forgiveness. Notice that the word “forgiveness” is used and not “cancelation.” These are mostly reductions in the loan balance owed, and the amount of reduction is based on the student’s income and financial situation, unless they are still dependents.4
A few elements of the plan:
- Private loans are not covered at all.
- Payments will be capped based on several factors.
- Paused loan payments will resume in January, 2023.5
- Borrowers may need to apply for loan forgiveness.
Again, borrowers who are dependent students need to qualify based on parental income, not their own income. For families with substantial means, this would likely be a deal-breaker.
Finally,what about taxes? Because of the American Rescue Plan Act of 2021, no federal taxes would be due on forgiven loan amounts. But the few states that have not yet aligned their laws with this Act could still tax the amount of student debt forgiven.
For many parents who have already spent a small fortune on their children’s loan-free educations, it’s tough to stand by and watch the push toward student loan forgiveness. But for families who made the right choice in going to college but had to borrow to do it, their children can now reach the light at the end of the tunnel years and years sooner. In theory, this should have a positive effect on the overall economy.
Annual Gifting and Education
Now, tax professionals often advise wealthy clients to take advantage of the gift tax laws and write checks to family members. The limit in 2022 is $16,000 that can be given to each individual from each tax payer. There are lifetime limits, and you should consult with your tax advisor for details. But many education-related expenses such tuition and necessary fees can be paid for directly on someone else’s behalf and won’t be counted against the annual limit.
529 Education Plans
Qualified Tuition Plans, commonly called 529 Plans, are savings plans that fund future education costs such as college. In certain states, it can even be used earlier, for private and vocational schools. It’s another tool in the box of parents and grandparents who want to invest wisely in educations.
TheTakeaway
For those whose long-term thinking includes the educational futures of children, grandchildren, and even beyond—congratulations. It’s this kind of planning that makes for wealth that continues to grow from generation to generation. As always, your financial advisor should be a good resource for learning more about this important topic.
Sources:
1 https://nces.ed.gov/fastfacts/display.asp?id=76
2 https://www.gobankingrates.com/money/economy/inflation-impact-on-college-tuition-america/
4 White House Fact Sheet, August 24, 2022
5 The New York Times, August 25, 2022
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