Friday, October 30, 2009

The Cost & Rewards of A College Education

Part 1 - Education Pays

It should come as no surprise to a parent that the cost of sending a child to college is an expense which continues to rise year over year. The average annual total tuition and fees at four-year public colleges and universities in 2009-10 are $6,585. Throw in room and board and the total cost climbs to $14,333. This is 6.4% higher than they were in 2007-08. As staggering as this annual increase seems, it is significantly smaller than in preceding years. This 6.4% increase follows increases of 13% in 2003-04, 10% in 2004-05, and 7.1% in 2005-06.

How does the cost at a four-year private college compare? Average total charges, including tuition, room and board, and fees are $34,132 for 2008-09. This is 5.6% higher than last year, and has been the average over the preceding three years.

Come graduation day, the typical parent will have spent almost $58,000 for public universities and $137,000 for private or out-of-state universities.

However, to most Americans the skyrocketing cost of sending a child to college seems to overshadow the long-term benefits of a college education. Numerous studies have been done indicating a direct relationship between the level of education an individual receives and that individual’s earnings potential. These studies show that, monetarily, a college education is an investment that pays off over a lifetime. In 2008, the typical full-time worker with a four-year college degree earned $50,856. This is 65% more than the $30,732 earned by a full-time worker with only a high school diploma. A worker with a master’s degree earned over twice as much, $63,856, as the high school graduate. In fact, the earnings gap for college graduates versus high school graduates is estimated to exceed $1 million over an individual’s lifetime.

The information contained in this report attempts to summarize the various savings vehicles and college funding options available to most Americans today. While the costs to attend college may be imposing for many families, the costs associated with not going to college are likely to be much greater.

How Are Parents Saving Today?

A recent Gallup survey commissioned by Sallie Mae revealed that three-quarters (75%) of the 1,200 parents surveyed thought it was "highly likely" their children would be attending some form of higher education after high school. Of this group of parents, 62% (but only 32% among those with household income below $35,000) of them have saved or invested for college.

The survey found that only 33% of parents are investing in 529 savings plans, and only 20% of households earning $150,000 or more are taking advantage of them. A majority (59%) used savings, money market accounts, or CDs while 41% saved with stocks or bonds. 35% of those not saving for college anticipate scholarships or financial aid to cover the cost.

Estimated 2009-10 College Costs for Selected Colleges

Below are total costs for some of the top universities in the United States, as ranked by U.S. News & World Report. These figures represent the total cost of sending a Texas-resident student to each school for the 2009-10 school year, including tuition, room and board, fees, books, and miscellaneous expenses.

For colleges in Texas:

Public Universities:
University of Texas - $25,284
Texas A&M University - $20,531
Texas Tech University - $18,464
University of Houston - $16,418
Stephen F. Austin University - $11,360

Private Universities:
Rice University - $45,685
Southern Methodist Univ. - $43,295
Baylor University - $42,898
University of St. Thomas - $30,906
St. Mary’s University - $30,266

Other colleges in the United States:

Exclusive Universities:

Stanford University - $53,652
Harvard University - $52,000
Brown University - $50,560
Dartmouth College - $49,974
Princeton University - $49,190

Private Universities:
Georgetown University - $55,130
Vanderbilt University - $54,718
Northwestern University - $53,608
Tulane University - $52,240
Notre Dame University - $51,300

Public Universities (Non-TX):
UCLA - $46,420
University of Michigan - $44,797
Miami (OH) University - $41,864
University of Colorado - $38,365
Louisiana State University - $22,195

With college costs increasing at alarming rates, advanced planning is required to make these costs affordable for your children and/or grandchildren. Time and the power of compounding are your most valuable assets.

In the coming weeks, I will be posting more information on the various savings vehicles parents should be aware of, including 529 Plans, Coverdell Savings, Education Savings Bonds, and UTMA/UGMA accounts. Other topics will follow, including the basics of financial aid, tax incentives available for educational expenses, and programs designed specifically for members of the military. Please check back regularly for more updates. Better yet, click on 'Follow' on the home page to be notified when items are posted to this blog.

Friday, October 16, 2009

Key Planning Opportunity For 2010

As with the start of every New Year, some key financial planning opportunities will be available to all investors beginning in 2010. One opportunity that has not received nearly as much press as others is the upcoming changes in the Roth IRA rules.

Roth IRA Background
Roth IRAs were created with the Tax Payer Relief Act of 1997. The attractiveness of a Roth IRA is very apparent. Not only do funds placed in a Roth IRA, whether through annual contributions or conversions from traditional IRAs, appreciate tax-free, all distributions from a Roth IRA are tax-free as well. Additionally, unlike traditional IRAs where you are required to withdraw a certain amount each year starting at age 70 ½, there are no required minimum distributions (RMDs) with Roth IRAs.

For the most part, though, the benefits mentioned above were only available to those families who’s modified adjusted gross income (AGI) was less than $100,000 each tax year. This restriction kept the Roth benefits out of reach for higher income earners – the ones who would gain the most from the benefits.

However, a provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) removes the income limitation on Roth IRA conversion eligibility beginning in 2010 – and this is a key planning opportunity for everyone, regardless of annual income.

New Roth Conversion Rules
Beginning January 1, 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income. This new tax window opens the door to a tremendous tax-planning opportunity for millions of people, who hold more than $1 trillion in traditional IRAs.

It is important to understand that the conversion process is a taxable event. The amount you decide to convert is deemed income, and you will owe taxes on that amount at ordinary income tax rates. However, the provision within TIPRA states that taxes recognized due to conversions made in 2010, and 2010 only, can be spread over two years. Therefore, half of the taxes due can be paid in 2011 and the other half paid in 2012.

Ironically, the market downturn over the past 24 months actually benefits those who are looking to convert into Roth IRAs. Undoubtedly, your traditional IRA balance today is considerably less than it was when the market began its decline in September of 2007. As a result, you are converting a lesser balance thus generating lesser taxes – taxes that can be spread over two years. Given the long-term historical returns of the market, your new Roth IRA will eventually recoup, and surpass, your traditional IRA balance from 2007 and you will not have to worry about another income tax issue as long as you have your Roth. Combine that with the anticipation of higher tax brackets in the future, and this becomes a great opportunity.

So, if you have ever considered converting your retirement accounts to Roth IRAs, 2010 is the year you definitely want to consider doing so. Please contact MTR Financial Services, LLC should you have any questions or would like to discuss your situation in greater detail.