Morgan Stanley
  • Wealth Management
  • May 20, 2019

Planning Ahead for the Rising Costs of Education

Though education costs continue their climb, starting to save early can make a difference.

Of all the things that keep parents awake at night, their children's looming college costs are among the most daunting. The average 2018-19 cost of tuition, fees, and room and board for a private, four-year college in the U.S. totaled $48,510—a jump of nearly $10,000 over the past decade. At U.S. public four-year institutions, those costs averaged $21,370, an increase of nearly $5,000 from 10 years ago.1

As a result, many students and parents are taking on significant student loan debt to pay for college. Roughly two-thirds of college seniors who graduated in 2017 did so with loans, with an average debt burden of $28,650.2

Starting the process early to save toward the college costs of a child or grandchild can help limit how much your student will have to borrow. Consider putting those funds into a 529 education savings plan, a tax-advantaged way to save toward education expenses. 

Benefits of Saving Through a 529 Plan

A 529 plan creates an incentive for families to save for future education expenses. That’s because earnings in a 529 plan can be tax-deferred, with withdrawals being exempt from federal and in most cases state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board and supplies. Many states provide additional state tax deductions or tax credits. Additionally, assets in a 529 plan are outside of the account owner’s estate for estate-tax purposes.

529 plans can also offer flexibility. Some investments that are used for education funding require that the assets be given to the beneficiary when they reach a certain age. If you open a 529 plan, as the owner of the account, you continue to make all of the decisions. For example, if your daughter wins a scholarship and won’t fully drawdown the money in the account, you can choose a different beneficiary within the same family, or even use the funds for your own education needs.

The definition of qualified education expenses now includes tuition for K-12 schools, as a result of the Tax Cuts and Jobs Act of 2017. Note that qualified withdrawals for eligible K-12 tuition are limited to $10,000 per beneficiary per year. Tax treatment will vary by state.

Igniting a Movement to Save for Education

Still, many are unaware of 529 plans and their benefits. More than two-thirds of Americans said they haven’t heard of 529 plans.3 To help raise awareness of 529 plans and combat rising levels of student debt, Morgan Stanley is supporting a campaign, led by the College Savings Plans Network and in partnership with Fred Rogers Productions, to educate families about the importance of planning ahead to save for college.

“Many people want to save for college, but don’t know where to start,” says Jennifer Tierney, Vice President in Wealth Management and 529 plans product manager. “This campaign will reach parents of young children and provide them with an opportunity to learn about their options.”

Though states began creating college savings plans in the 1980s, they didn’t gain federal tax relief under Section 529 of the Internal Revenue Code until 1996. As a result, those looking to help extended family members may be unaware of 529 plans.  

“Many of our clients are grandparents looking to help their children handle future education expenses,” says Jennifer. “We encourage them to take a look at 529 plans, which may not have been on their radar the last time they were saving for college.”

Maximizing Contributions to Your 529 Plan

Anyone can create a 529 plan for a designated beneficiary, and those who wish to contribute to the account may do so. Contributions of up to $15,000, or $30,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. Additionally, 529 plans enjoy a special rule: An upfront contribution in one year of up to $75,000, or $150,000 for married couples—the equivalent of five years' contributions—may be made without any gift tax consequences.4 This five-year gifting election can give your assets more time to grow if you're able to make such a contribution, and the “accelerated gift” is excluded from the donor’s estate.5 

Saving Early for College Costs

When it comes to investing in a 529 plan, the earlier you can start putting money away, typically the better. Following is an example of how various contribution levels affect savings over time, assuming a 5% pretax return:

The results in the table are hypothetical and are for illustrative purposes only and are not intended to represent future performance of any particular investment. Your actual results may differ. The principal value and investment return of an investment will fluctuate with changes in market conditions, and may be worth more or less than original cost.

For example, investing $100 per month from birth until age 18 may result in one and a half times the account value than if you wait and contribute four times as much per month when your child is age 14 and potentially a freshman in high school (i.e., $35,447 versus $21,723).

Still, it’s never too late to start saving for college. Money set aside when a child is 16 will still have several years to grow, assuming you use those funds to pay for the later years of undergraduate expenses, or even graduate school.

Your Financial Advisor can help you choose a 529 plan as part of your overall financial plan. Nearly every state offers at least one 529 plan, though you don’t need to invest in your home state’s plan. Before doing so, be sure to check with your Financial Advisor and tax preparer to determine if your state offers tax deductions or other benefits if you invest in your own state's plan.

“A Financial Advisor can help you project what your costs could be, provide guidance on selecting a 529 plan, recommend an asset allocation and tailor your contribution schedule based on your needs,” says Marc Dextraze, an Executive Director in Wealth Management who specializes in education-saving solutions.

529 plans are a convenient, flexible, and tax-advantaged way to save for a child's education expenses. Morgan Stanley offers a robust selection of 529 plans from some of the nation’s leading mutual fund companies. If you have questions or need more information about 529 plans available through Morgan Stanley, contact your Financial Advisor today.

Morgan Stanley is partnering with College Savings Plans Network, and Fred Rogers Productions – the company founded by Mister Rogers and the producers of Daniel Tiger’s Neighborhood, on a campaign to increase awareness of 529 plans and limit college debt for future generations.

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