Planning for College Education

By Phillips, Lawrence C.; Robinson, Thomas R. et al. | Journal of Accountancy, September 1996 | Go to article overview

Planning for College Education

Phillips, Lawrence C., Robinson, Thomas R., Fleming, Peter D., Journal of Accountancy

As students head back to school, it's time to revisit the question of how to meet soaring college costs.

Today, a child's ability to go to the college of his or her choice involves more than just getting good grades or writing the perfect application essay. The upward spiral of tuition and room and board means cost is more of a factor than ever before. While most parents want their children to attend the school of their choice, many either fail to plan in advance for the expense or are unable to cope with costs that are rising faster than the inflation rate.

CPAs can help clients plan for their children's education in a number of ways, which requires them to understand trends in college costs, the financial aid process, tax issues and investment alternatives. Failure to adequately consider the potential impact of each on a particular situation can undermine even the best plan.

What can go wrong? A recommendation to transfer assets into a child's name to minimize income taxes may reduce the students' financial aid eligibility. Using Series EE savings bonds in a college fund may be inadequate since college costs are rising at a rate that often exceeds these bonds' aftertax yield. This article explores these and other issues to help CPA-financial planners provide clients of all income levels the best possible education funding advice.


It is first necessary to consider current college costs and expected future changes. According to the College Board, the average annual cost of a four-year public college in 1995 was about $9,000, which includes tuition, fees, books, supplies, room, board and transportation. The average cost for a four-year private college was about $18,800. The College Board says costs have been increasing at 6% annually. And given recent trends in higher education and employment-- with many professions requiring advanced degrees--CPAs also should consider that graduate or professional school funding may be needed.


Financial aid consists of federal grants, loans and work-study programs. Additional programs are available at the state level, from colleges themselves and from private groups.

Aid eligibility is based on education costs less the expected family contribution, which is determined based on the income and assets of both the parents and the student. Parents are expected to contribute part of their adjusted available income--taxable and nontaxable income plus 12% of discretionary net worth--less an allowance for family living expenses, including taxes.

At the highest income level, parents would have to contribute 47% of their income and 5.6% of their discretionary net worth to meet their children's education needs. Students are expected to contribute 50% of their available income from investments, summer or part-time employment, etc. and 35% of any assets. Accumulating assets in a college fund will, therefore, reduce the aid a student receives. Because the contribution rate is higher, this will be especially true if the assets are held in the student's name.

The timing of investment sales also should consider the financial aid process. Ira student's college fund consists of growth stocks that are sold in the current year, the amount of aid the following year will be substantially reduced because college aid rules consider income only in the year immediately preceding the year of application. Therefore, sale during a child's junior year of high school or before can avoid this problem.

Families with a high net income and net worth often are not eligible for aid regardless of the rules, making tax-advantaged advance funding particularly appropriate. How high is high? Under current guidelines, for example, a family with $80,000 of income and $50,000 of discretionary net worth would have an expected contribution of about $15,400 annually. This would make a student eligible for some aid assuming he or she planned to attend an average private school. …

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