Attending college is costly, but according to new research, not going to college is even more costly. Pew Research Center found that Millennials with a college degree earn more than those who stopped their formal educations during or after high school. Between 1965 and 2013, median annual earnings, among college-educated full-time workers aged 25-32 rose to $45,500. Meanwhile, their high-school-educated peers lost more than $3,000, with earnings falling to $28,000 over that time period. In other words, a college degree is worth more and a high school degree alone is worth a lot less. That differential adds up over time: According to Priceonomics blog, a college degree offers a 30-year wage premium of over $200,000 in extra income ($6,667 a year) compared to a high school graduate’s salary.
For Millennials, like the broader population, going to college may help you get or keep a job. The unemployment rate for high school grads is 12.2 percent, while for those with a degree, it is two-thirds lower, at 3.8 percent. Those with two years of college fall in between at 8.1 percent.
I know what you’re thinking: “What about the escalating costs of education and those ballooning student loans?” In the survey, 66 percent of Millennials said they had borrowed to pay for school, compared to 43 percent of boomers. That explains why outstanding student loans have soared to over a trillion dollars. One way to keep debt levels in check is to only assume a total student debt load that matches what you think you will earn in your first year of work. If you’re going to be an engineer, you can borrow more than say, an art history major.
The good news is that the College Board has reported that the rate of tuition increases at U.S. colleges and universities has slowed down in recent years, it is still a huge burden for American families. The average annual tab for public colleges is $8,893, though after subtracting grants and financial aid, the net cost is $3,120. Private universities total $30,094, with a net cost of $12,460. Tack on room and board, and the price tag increases by another $10,000 or so.
Because the value of a college diploma is so great, families are increasingly seeking the help of older generations to foot the bill. But, how the extended family helps can have a big impact on a student’s financial aid chances. That’s why it’s important to understand some of the rules surrounding college savings and financial aid.
On the positive side, a grandparent’s assets are not included when colleges determine eligibility for financial aid. My favorite education-funding vehicle is the 529 plan, which allows for tax-advantaged investing for college. Contributions within the account grow tax-free and are not taxed upon withdrawal, provided they are used for qualified higher education costs.
Another benefit of 529 plans is that they can be a terrific estate planning tool, because wealthy grandparents can remove assets from their estates either using the annual gift tax exclusion of $14,000 or by making a lump sum that is far larger. The nice part is that the donor can maintain control over the investments and the ultimate use of the money.
However, there is a big downside to using a 529 plan that is in the grandparent’s name. When money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income. For every dollar of income, a student’s aid eligibility may be reduced by as much as 50 cents. In order not to diminish the ability to receive aid, there are a few work-around solutions.
1. Wait to use money in the 529 until the student’s senior year: Tapping the account for the last year of school shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.
2.Trasnfer ownership of account: A few years before the first aid application is due, grandparents could transfer ownership of the account to a parent of the beneficiary. Assets in a parent-controlled account get assessed for financial aid purposes, but disbursements do not appear on the income statement of either the parent or the student. Fair warning on this idea: some states, like New York, do not allow changes in account ownership unless there’s a court order or the owner dies.
3.If the 529 plan ownership seems too complicated, grandparents might considering gifting the money to the parents, who can then deposit the gift into their own 529 accounts that have been established for the kids. It makes sense to wait until after the aid has been determined before making the gift. Alternatively, extended family members may choose to wait until the student has graduated and then help with college loan repayment.
It takes a family, a village and just about everyone else to fund an education, but the investment is worth it!