Tuition Costs create College Madness
Welcome to the season of March Madness basketball. If your house is like mine, we have a screen streaming Women’s and Men’s games throughout the day. Some of you may even be so dedicated and fill out a bracket. One of our traditions is to have our family of four, fill out a bracket for the Women’s and Men’s tournaments. All strategies are on the table - the kids will pick their favorite mascot, my wife will typically pick Duke to win it all, and I may rely on flipping a coin. All in all, it’s good fun and quality time with the family. What strategies do you use to complete your bracket?
Let me suggest one Bracketology strategy in an attempt to be the 1 in 120.2 billion according to NCAA.com to complete a perfect March Madness bracket, the cost of college tuition. Let’s take the most expensive college in the Women’s tournament USC at $340,256 and in the Men’s Northwestern at $357,576. These numbers are based on a four-year out-of-state tuition, fees, room, and board.
I would imagine that your first thought in seeing these tuition amounts is how staggering these numbers are. Now, let’s use my two kids as an example. Say Lena decides to go to USC in 10 years and Lio goes to Northwestern in 13 years. Those college costs are projected to be $609,347 for USC and $762,684 for Northwestern using 6% inflation. {Takes a deep breath}. There is no way to beat around the bush, those numbers are hard to swallow.
Unlike the probability of creating a perfect bracket, there are strategies we can implement to save for college. One of those is a 529 plan.
What is a 529?
A tax-advantaged investment account designed to help you save money and pay for qualified educational expenses for kindergarten through graduate school. Think tuition, fees, room and board and other related expenses that are required for enrollment. However, transportation, insurance, and personal living expenses do not qualify.
Two types of plans:
- Prepaid tuition plans: Allows families to save for future college expenses while locking in today’s prices.
- Educational savings plans: Allows families to save for college using investments like mutual funds or age-based portfolios.
Tax Benefits:
529 earnings grow tax-deferred and withdrawals are exempt from federal income tax if used for qualified educational expenses. Depending on state rules account owners may be able to take advantage of an income tax deduction. Here in Virginia, an owner can deduct $4,000 per account, per beneficiary. In other words, at 5.75% the highest income tax bracket, an owner would save $230 each time you deduct $4,000 from your Virginia Adjusted Gross Income.
Bracketology
On second thought, the college tuition strategy may not be the wisest choice to use. For the tournament, I will stick with flipping a coin or just pick based on mascots.
Let me leave you with some food for thought. Some parents, myself included are hopeful that their young athlete will get a scholarship in the future. However, only about 1-2% of high school athletes play Division II college sports. Furthermore, the average basketball scholarship for Division II men is $6,536 and for women $7,927 as seen in the chart below. Based on those numbers we should all be looking at alternative college planning options. This is the tip of the iceberg and how planning for college costs can bring on “madness.” Stay tuned as I’ll be sharing more options to consider when it comes to college savings.
EBW Men’s Tournament Picks
I can’t write an article about March Madness without mentioning our picks:
Alabama, UCLA, Kansas, Duke, Miami & Texas
Dañosos Household Picks
Women’s: South Carolina, Stanford & Virginia Tech
Men’s: Duke, Alabama & Kansas
Please note that EBW Advisors are not tax professionals. If you have specific questions related to your tax situation or the preparation of tax returns, please contact a tax professional.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state's 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state's 529 Plan.