When it comes to giving to those we love, there are many different types of gifts ranging in both size and extravagance. One such meaningful gift is that of a college education. This legacy is made all the more significant when you consider the current cost of such a gift.
According to educationdata.org, the average cost of college tuition in the United States in 2021 was $35,720 per student per year.[i] They further note that this cost has tripled in 20 years at an annual inflation rate of 6.8%.[ii] At Pepperdine University, located just several miles from Westlake Village, the 2021-2022 cost of tuition is $59,450.[iii]
As these costs continue to rise, they can present a significant obstacle for those seeking higher education. However, you can make a part of your legacy by gifting the opportunity to learn to your grandchildren. Here are five things to consider.
1. What's the Best Way to Save?
Some savings accounts are better than others when it comes to saving specifically for educational goals. For example, 529 accounts and Coverdell ESAs offer tax-advantaged ways to save for college expenses and other types of education in some instances. It can also make sense to utilize a Roth IRA.
When it comes to saving for education costs, each of these avings vehicles comes with various limitations, including annual contribution limits, income limitations, and availability for use. When planning for this goal, it's essential to consult a professional who can make sense of your specific financial situation and recommend the best kind of account.
2. Get Started Now
Like many savings goals, it's a good idea to start saving sooner rather than later. As previously mentioned, college inflation has historically risen at nearly 7% annually. With this high level of inflation, it's important to be investing your education savings. The earlier you can invest, the better as a long time horizon will give you a greater chance of meeting your savings goal.
3. How Much Should You Save?
Consider utilizing a college expense calculator ) to give you an idea of how much you need to be setting aside each year to reach your target savings goal. However, keep in mind that calculators, while offering a good starting place, are sensitive to their assumptions, which can cease to be reasonable over time. Like any financial goal, it's essential to check in with a financial advisor periodically and make sure that you reconcile your assumptions with reality to stay on track with your plan.
4. Will You Require Flexibility?
While seeking higher education can be an excellent opportunity for some, it is not for everyone. As you contemplate your educational gift, keep in mind the person the gift is intended for and what makes the most sense for them.
The good news is that lawmakers are mindful of this and have made college savings vehicles more flexible. For example, 529 accounts can now also be used for trades programs, giving them a broader use for individuals who may want to obtain alternative forms of education.
Furthermore, in particular accounts, benefits can often be passed on to other family members, such as siblings. They can also be used for other expenses like K-12 private school (to a limited extent). When considering your education goal, take note of what qualifies as an education expense when choosing different savings vehicles.
5. Share Your Goal
Finally, consider sharing your education goal with the intended recipient. It can be uncomfortable at first, particularly if you're not used to talking about money with your family. However, one of the ways to engage your family in your financial legacy is to share your vision and values with them.
Sharing your goal doesn't mean that you have to sit down and have a formal meeting (though you can if you want to). It may be as simple as asking your grandkids what they like learning about, what they want to be when they grow up, and potentially letting their parents know that you'd like to help out with their college expenses because education is important to you.
Schedule an introductory meeting to discuss how to make an educational gift part of your legacy. One of our financial advisors would be happy to sit down with you and discuss your vision and help you build a family legacy plan to make it a reality.
[i] Melanie Hanson, “Average Cost of College & TUITION,” EducationData (EducationData, August 15, 2021), https://educationdata.org/average-cost-of-college.
[ii] Ibid
[iii] "Admission," Pepperdine University Tuition | Cost | Seaver College (Pepperdine University), accessed September 13, 2021, https://seaver.pepperdine.edu/admission/financial-aid/undergraduate/costs/budget-costs.htm.