President Obama's College Plans and You

If you watched President Obama's State of the Union or have been following the media reports about his agenda you have probably seen a headline on "Free Community College" like this story in the New York Times.  In addition, you might have also heard about other plans to tax withdrawals from 529 savings accounts - which are investment funds specifically for the purpose of paying for college.

So you may be asking, aren't these two policies in conflict?  On one hand you are proposing free community college, but on the other hand you are penalizing families who would use 529 funds to cover attendance at four-year colleges.   Aren't community colleges inexpensive anyway and 4-year colleges where cost relief needs to come from?  A very good point.

Let me try to explain what the President has in mind and how it might impact you.

Free Community College
Yes, you heard it right.  The President is proposing that all who enroll in a community college, earn at least a 2.5 grade point average, enroll consistently and at least part time can get their community college tuition covered by a program that would be funded by a combination of federal and state dollars. So right off the bat, you can see two major hurdles for the President.  He would need both the Republican controlled U.S. Congress and state legislatures across the country to ratify the plan. Many think this makes the proposal dead on arrival.   However, there are elements of the proposal that could survive.  One particular thing to watch is whether the federal government gets involved in the issue of poor community college graduation rates.  Key to the plan was that community colleges participating in the program would have to make some significant changes to student support systems and be accountable for graduation rates.   David Brooks makes the case for preserving that part of the plan and it could be a component families looking for affordable college options might monitor.

Taxing 529 Accounts
On the flip side.  President Obama is proposing taxing withdrawals from 529 savings accounts.  I have written about the value of these accounts in a previous post as a way to save for college. The tax is part of the President's "Middle Class Economics" strategy. The idea is to tax the earnings of from investments, which would include 529 plans. His argument is that a high percentage of families who invest in these plans are higher income homes that make over $200,000.00 per year.  The White House argues that the tax would be levied on the students, not the parents and because students are typically low income, the tax would be mitigated by their low earnings.  The bottom line here is that to avoid these taxes, you might have to consider having your son or daughter file taxes independently and count the 529 funds as income.  However, unless they have developed a wiz bang app for the Iphone and are taking down serious money, the tax would be mitigated or eliminated because of their standard deduction and low income.

Tax Credit for College Costs
The President also proposes consolidating and simplifying the number of tax credits for those paying tuition for college.  The proposal would consolidate existing programs into the existing American Opportunity Tax Credit (AOTC). The full tax credit of up to $2,500.00 is available to individuals who have an adjusted gross income of $80,000.00 or less or married couples with incomes of $160,000.00 or less.  By consolidating existing programs under AOTC, he hopes more families will access the program.  In addition, he is expanding access to the program for those students who enroll less than half time.  His hope is that the losses from 529 plan will be more than compensated for by greater participation in AOTC.

Ending Student Loan Interest Deduction
The final component of the plan is to end the deduction on interest from student loans. The argument for eliminating the deduction is that the benefit reaped by borrowers is quite low, usually no more than about $100.00 and that those resources could be more effectively utilized to cover the costs for students who are currently enrolled in college.  The fact of the matter is that you would need to be in repayment mode on your loans to benefit, which means you are not enrolled in college.  It makes more sense to put money toward supporting students who are in college.

It very well may be that none of the proposals here ever see the light of day.  On the other hand, education issues and workforce training are high priorities for both parties, so I suspect that something will be passed.  College Prep Pop will be looking for proposals from the Republicans and do our best to keep you informed of what is happening.

The College Cost Conundrum

Christine and I found ourselves talking college savings as we prepared our taxes this past week. With a freshman in high school, one in middle school and another to follow - it is not surprising that the cost of college takes up many dinner time conversations at our home.

Planning for college is an overwhelming and daunting exercise for parents in the 21st century. As parents, we know that our children will need some kind of education after high school - whether that be a four-year degree, an applied associate degree or certificate - to have a real chance at a livable wage job. On the other hand, we see the headlines about rising tuition and student debt and we have a minor panic attack.  Most of us also don't see how the math works - how can I possibly save enough to put my son or daughter through college?  It is a very real dilemma.

According to the College Board's annual report on college pricing - In-state tuition, fees, room and board at a public four-year college averages around $18,500.00 per year.  Want to go out of state? a public 4-year will cost you about $31,000.00. Daunting, I know.  

What about financial aid? Yes, there is federal aid and state aid in many states for those who financially qualify. Many states have merit based aid for students who meet certain academic requirements. Finally, many institutions have their own financial aid packages.  In many cases, this helps with the cost, but you will still be looking at a substantial investment.  According to the College Board the "net price" - college costs after financial aid and other deductions - for in-state tuition, fees, room and board are about - $12,600.00 a year.

These numbers give you a ballpark to play in - but depending on the institutions you are looking at, the ball park could be Yankee stadium or the Toledo Mud Hens ballpark.  Meaning that there is a wide variation, even for public institutions, depending on their selectivity, size, etc. 

If the story in the New York Times this past week is any indication, your guess on what you can count on in terms of financial aid is as good as mine. The way colleges set a net price for their college can be confusing and overwhelming.  

The whole enterprise makes you want to crawl under your bed and hide.  So where to begin?  I will spend some time writing about some of the options in the coming weeks, but here is a start.  

Step one - Start a 529 Savings account for all your children.  529s are a kind of 401K for college savings - a tax deductible way to save for college.  Most states have a public 529 program available.  You can also go through a bank or an investment firm to get one started.  529s will accumulate investment gains that are much higher than a simple savings account.  Here is a good list of state 529 plans. 

Step two - Set up an automatic withdrawal from your bank account into your 529.  Set aside a minimum amount that comes out of every pay check to get started - whatever you can afford.  If you have not done this yet - change your schedule today and get it done.

Step three - Set two target institutions. Look for an in-state public institution that you would likely want your son or daughter to apply to and a "stretch" college that would be a viable, but financial stretch. Find their tuition, fees, room and board cost to give you a range.  We found this great tool on the Colorado College Invest web site as one resource, it includes in-state and out of state colleges, although it appeared to be list price - not net price. There are many other net price calculators online that you can use. Here is the net price calculator at The College Board and another from the U.S. Department of Education.  These calculators are helpful, but not fool proof.  

Step four - Set a target savings amount.  Most of us won't be able to save for the whole cost - so set a percent goal or other number.  We are shooting to save at least two year's worth of the total price of tuition, fees, room and board (not net price) before he graduates from high school for Ben's top target institution 

Step five - Develop a plan to reach that goal.  Ideally you would save a consistent amount each month. The more you invest now - the greater return you will get down the road.  So challenge yourself a bit. However, you might want to ease into it.  Set a base amount and increase it, maybe every 6 months, to move toward your goal.  

These are some real basic initial steps.  In the coming posts, we will start to explore some more creative options.