ith the fall semester well under way at colleges across the nation, there’s a lot on the minds of students and their parents. Not going unnoticed is that in recent years, many college graduates are coming home with more than a degree. They are arriving with huge debts and without job offers.
This is a frightening prospect for graduates and their parents. Taxpayers should also be concerned.
College costs have soared in the last few years, increasing at about twice the inflation rate. Increases have averaged 5 to 8 percent. The College Board’s most recent survey shows that the cost at an in-state public college for the 2011-2012 academic year averaged $21,447. The cost at a private college averaged $42,224, which would require more than half of the average family’s income.
According to a federal government estimate, the total outstanding student loan debt was more than $1 trillion in 2011, made up of $864 billion in federal government loans and $150 billion in private student loan debt.
Next year, taxpayers are in the risky position of investing $6 billion for students who are not likely to pay back their loans. Given a choice, that is a risk that most investors would not take.
The kind of degree earned is the key to opening job opportunities. This was addressed earlier this year in an article by U.S. News and World Report. The article pointed out that there is a mismatch between what students are interested in doing and jobs that employers have available. Based upon employer needs, degrees in engineering, biological sciences, computer and information science, physical sciences and business would best serve graduates.
The cost of college can be made more manageable by beginning to save for this big expense soon after a child is born. By saving regularly, parents are more likely to generate the money that will be needed.
Congress created Section 529 Plans in 1996 to encourage individuals and families to save for future college expenses. Because of the tax advantages, these plans have emerged as one of the preferred ways to save. Growth of the money contributed to these plans is tax-deferred by both the federal and state governments. Instead of paying income tax on earnings every year, taxes are deferred until withdrawals are made from the plan.
States have added their own tax advantages to 529 plans. States operate these plans, but typically designate an experienced financial institution to manage their plan.
In the NC 529 plan, residents can deduct up to $2,500 as a single filer and $5,000 for married filers. However, there is much more to consider than in-state tax deductions when choosing a plan. Although history doesn’t foresee the future, it’s wise for parents to examine plans from states that have the best performance (earnings) record.
Morningstar, the investment research firm, has ranked 529 plans. The top six plans were Alaska’s T. Rowe Price College Savings Plan, Maryland’s College Investment Plan, Nevada’s Vanguard 529 College Savings Plan, Ohio’s College Advantage 529 Savings Plan, Utah’s Educational Savings Plan, and Virginia’s College America 529 Savings Plan. North Carolina’s 529 Plan is ranked 18th.
Avoiding this tremendous financial burden should be on the minds of parents very early in their child’s life — not when they are entering college.