What Matters Most – Education Planning with Keith Sanders
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Eric: Hello, and welcome to “What Matters Most,” the podcast all about finances, communities, savings, and security for you, your family, and your business. This podcast is brought to you by the helpful folks at my bank, First United Bank & Trust. I’m your host, Eric Nutter, and in today’s episode, “What Matters Most,” is education planning. Planning for your child and grandchild’s education. And for this helpful discussion, I’m thankful to be joined remotely today by Keith Sanders, Senior Trust Officer in the First United Wealth Management Department. Good morning, Keith. How’s it going?
Keith: Good morning. Doing well. Thank you, Eric.
Eric: Yeah. Yeah. I appreciate you joining today. I think that this topic is timely for both of us I believe. I’ve got a 15-year-old who is getting ready for upcoming college. And so, oh, well, and I am having to get ready for the upcoming college expense. And you’re one foot into college, aren’t you? And you’ve got another foot coming.
Keith: I am. Yeah, I got one daughter who’s actually in college now on sophomore year and I got a son who’s a senior. So, it’s very near and dear to my heart as well.
Eric: Well, let’s get into this. You know, we wanted to talk about this because, you know, the cost of education continues to rise. I think historically, they say college costs double every 10 to 12 years and the cost usually rises faster than the rate of inflation and the, you know, family income. So, first of all, why do the costs keep going up? What’s happening, Keith?
Keith: Okay. Yeah. Well, Eric, you know, it’s interesting. I mean, no matter where you look, whether you picking up a newspaper or watching the news at night, I mean, the cost of education continues to go up and students are being strapped with more and more educational loans every year. And part of it though, is, you know, just the colleges themselves and how they’re transforming. A couple of things are happening. One is that school enrollment is growing. And so, we’re seeing more students on campus. And so, when you have more students on campus, that means you need to build more buildings, you need to hire more faculty, you’ve gotta build bigger dorm rooms, you’ve gotta build bigger dining halls. So, all that, kinda, you know, pushes up the expense.
The other thing is that colleges are really working hard to attract students. And so, what that ends up costing our students is that as they try to get recruiting more and more students, you’re looking at top-notch faculty. You want the best professors, they want them to have research, and that costs more money, not only in salaries, but also in benefits to those professors. And then there’s always the cost of technology, you know, just when we think we’ve got technology figured out, it’s changing again and students being the early adopters of that technology, you know, what we’re seeing is that, you know, the technology is being replaced every three years. So, schools, you know, just got the colleges all wired with, you know internet access, and then before you know it, the wireless internet took over. So, that change is constantly happening.
And just a few of the other things, Eric, is you know, there’s that because now colleges are building nicer dorm rooms, it’s not the old dorm rooms where you had two bunk beds in a brick room. Now, you’ve got quads and apartments and, you know, they’re really nice the living arrangements that all cost money. And so, that’s all, kinda, forcing or pushing the cost of college to go up where it’s a lot more expensive and the result is that students are ended up with more debt when they get out of college than they have in the past.
Eric: Yeah. You’re telling me they have better than the brick room, super hot third-floor room that I had with no air conditioning? And so, you open the window to try and cool off, but you’re sweating non-stop and you’re sleeping in bunk beds? It is nice now.
Keith: Yeah. They call them residential facilities or apartment suites. I mean, that’s how nice they are today.
Eric: Nice. Oh, these kids. So, Keith, tell us what is the national average cost for education currently?
Keith: Yeah. You know, for the 2020, 2021 school year, you know, just to give you a comparison, if you look at a private college, you’re looking about $36,000 a year. If you look at an in-state public college, about $10,440 a year. And if you’re an out-of-state student going into that public college, it’s about $26,820. So, now, that’s the cost of just the tuition. You know, the other thing that I think, you know, parents and also students have to take into consideration is room and board. And that’s gonna run you anywhere from $12,000 to maybe…well, $12,000 at a private college and about $11,000 in a public school. And again, on top of that, Eric, I think a couple of other things, you know, you put into that budgeting process is looking at the average cost of books and supplies, which is about $1,200 a year, and then transportation and entertainment, which can cost up to $2,700, $2,800 a year. So, all in it can add up pretty quickly, Eric.
Eric: Yeah, no doubt. So, what can parents and grandparents or who are preparing for this, what can they do to prepare for, you know, this future of just the price just keeps going up? What advice do you give?
Keith: You know, I think there’s probably five points that we can talk about and then we’ll get into some of the details later, but the fine things I think is number one, start a college savings plan early, you know. As soon as the kids are born, let’s start putting those plans in place and saving for college. And when I say college, you know, it can be a private college, it can be a public college, it could be a trade school. I mean, they’re all expensive. So, start early in that savings process. And I think second is, you know, focus on scholarships. There’s a lot of scholarships out there that people don’t know about or apply for. And it’s sometimes it’s like finding a needle in a haystack, but there’s scholarships out there. So, you’ve gotta work on really focusing on those.
Keith: My third point, Eric, would be, you know, be open to the colleges that you look at. They’re all gonna have different prices, they’re all gonna have different offers, but, you know, keep your mind open and looking for what degree and where that college is located. And then the other two things are just, you know, avoid debt and explore the student aid that’s out there.
Eric: Yeah. Is there a way to find those available scholarships that’s easy?
Keith: No. I think really, it just takes some time and some effort. You know, scholarships are out there, but you’ve really gotta start, you know, looking for them early in the process, you have to apply for them. But, you know, when it comes to really starting that process and getting ready for college, parents probably need to start that by their sophomore or junior year for their students and really start looking for and preparing for that process. The first place to start that you gotta start with the FAFSA form. And so, this is the one of the things I think that most parents really struggle with. And the FAFSA form is your Free Application for Financial Student Aid. But it’s a form that’s required to be filled out before you can even get any student aid or get qualified for it. And a lot of parents don’t like to fill it out because it requires you to disclose things like your income, your assets and, and any assets that are owned maybe by the students. So, it’s one of those, we’ll call them evil necessities, but everybody has to do. And that’s where you start first. So, you got to fill out that FAFSA form.
Eric: Gotcha. So, what about for the students? I mean, beyond the FAFSA forms, is there something that parents can be doing or grandparents can be doing to get students off on the right foot footing?
Keith: Yeah. You know, I’m talking about money and just education. I think those are a couple of important things that we’ve all gotta talk to our children about. And what I mean by that is there’s a few things that you can talk to your children, whether it’s a son or a daughter about at a young age to really try to teach them about money. And those are things like, you know, show your child how to budget. And it might be a simple budget, but, you know, nonetheless, understanding what money you have, what you have to spend. And that goes back to my discussion about the cost of transportation and entertainment. I mean, you have know-how to budget your money which you have to spend.
Keith: You can also encourage children to get a job while they’re at college or even in their high school years because then they start to learn about what a paycheck is, they learn about taxes and they learn about, you know, that budgeting process. So, I think always, you know, teaching a child at a young age to get a job and how to manage money is important. You know, teach kids also…a couple of problems that we see with children who do go to college is that they don’t track what they spend or know where the money goes. And so, that’s always one of the things I think that we can teach our children to increase their educational knowledge of what money is and where it is is teaching to track what they spent. And then the other thing is really to explain credit cards, and debit cards, and how those work because so many students will get offers while they’re at college parties for these free credit cards, but they don’t understand that they got to pay them back. So, teach is early in the process, a great way to really prepare them and let them know what they need to know so they don’t get in trouble.
Eric: Well, I mean, yeah, and it’s certainly important. I mean, just in my own life, I remember having credit card debt and student loan debt coming out of school to the point that I was paying those off for years beyond, you know, beyond school. So, I was, you know, years into my career before I finally paid off all my student loans and credit card debts. And it was a hard lesson to learn.
Keith: Sure. Yeah. And that’s one of the problems is that, you know, children, our children, grandchildren just don’t really understand the consequences of having to pay that money back. And that’s a tough challenge for people to understand.
Eric: Yeah. Yeah. For sure. So, we’re gonna talk in a minute about the savings options. And you already mentioned filling out FAFSA ahead of other things, but what should parents do now to start the financial aid process? Is it just the FAFSA form or are there other activities they need to do?
Keith: Yeah. Well, you know, it all starts with the FASFA form. So, you know, get that done, get it completed. That’s probably one of the first things you wanna do. The other thing though is that, you know, children typically have to take either an ACT or an SAT test. And those are tests that really, kind of, look at their standardized ability to…or how well they’re gonna do in school. So, in general, the ACT is more looking at measures… it measures your students’ ability to know what they’ve already learned, where the SAT more looks at what you’re going to learn in college, but both of them are standardized tests that most colleges require. And by getting a good score on your ACT or SAT tests, you can qualify yourself for some additional financial aid. So, I would say start with FAFSA first, take the ACT or the SAT, and then go into your scholarship search and start looking for different types of scholarships. That’s where I would start the process, Erica.
Eric: Okay. And speaking of scholarships, so, once they’ve…so, they filled out the FAFSA, they’ve taken either SAT, ACT, or both, and then they’re, kinda, doing this search. So, what about scholarships? Do you have any tips for parents when it comes to looking at those?
Keith: Yeah. I think that the first tip is get really close to your school counselor. You know, they’re the ones that see the scholarships that come in on a local basis. And so, by talking to your school counselor, they can give you a lot of ideas and tips on, you know, what’s out there and where to look. But that process, like I mentioned earlier, I think it has to start early. So, you know, start looking for those by your sophomore, even your junior year. Make a list of scholarships that you think that your child could qualify for, and then block out the time to really make the applications. So, a lot of those scholarships will require a couple of things. One is you gotta do an application, and then there’s probably a due date. So, make sure you note the due date. You don’t wanna miss the deadline for application.
And then the third thing is really, look at…most of those scholarships will require an essay. So, if your child writes one good essay, you can use it for multiple scholarships and just adjust it so that it meets the qualifications of what the application is looking for. So, I think a couple of things. One, start the process early, you know, look at them all, get close with your school counselor, make sure you do a really good essay, and adjust it for each application in along those lines. So, I’ll forget to proofread those college essays and then continue to look for scholarships each year. Even after your first year of college, there will be other scholarships that come up that you can apply for. So, continue looking for those year after year.
Eric: Yeah. I remember my time in school that a lot of scholarships, a lot of aid efforts, I would learn of people getting them and they received them and not necessarily because they were the best essay that got submitted, but it was because not very many people even applied. So, they qualified or they won the award of money simply because only a handful of people applied and so, therefore, everybody got it.
Keith: Right. And you know, Eric, we’re talking about the cost of college. I mean, you know, we talked about it continuing to go up. Every little bit helps, you know, don’t overlook those small scholarships that might’ve been set up years ago for $250 or $500 because they can add up pretty quickly.
Eric: Yeah. Every little bit helps. Okay. So, let’s talk a little bit about the savings options that people have. So, what type of accounts can be used when saving for college or trade school expenses?
Keith: Sure. And I’m gonna talk more about the types of accounts that are out there, and then I’m not gonna into the specific products, but, you know, I think there’s a couple of different options that parents and grandparents have to start saving for college. And the first one is the 529 college savings plan. It’s probably one of my favorite because it’s an account that was designed for saving for college. You can make sizeable contributions into the account. Actually, each person can make a contribution of up to $75,000, meaning a parent or a grandparent. And if I have both the parent and a spouse that could add up to $150,000 a one year that I can put into that account. So, it’s got a lot of flexibility to it. And then the benefit behind the 529 plans are that they will actually grow tax-deferred until the money is pulled out for college. And as long as it’s used for qualified education purposes, it comes out without any taxes at all. So, the 529 college savings plan is probably one of my favorite vehicles for saving for college expenses. It’s one of the best that are out there.
The second one would probably be the custodial accounts and the custodial account can be used for a lot of different things. It doesn’t have to just be used for college. So, you can put money into a custodial account. Each person contribute up to $15,000 per year. And if there’s two spouses, of course, that becomes $30,000. You can do more than that, but you might have to file a gift tax return. Now, with the custodial accounts, that money is held for the child until they’re the age of 18 or 21 depending on which state you live in. And then at that point, that money can be pulled out and used for any purpose. It doesn’t have to be used for just college. So, the custodial account will give you a little more flexibility. The downside versus the 529 would be that the money’s not gonna be tax-deferred. You’ll pay taxes as you go, but still, it’s another great option for people to, kinda, start and get put in place.
Keith: The other two options I would look at is the old Coverdell IRAs. And we used to call these the education IRA. They used to be rarely popular early in the process, but, you know, they do limit how much you can put in. You’re limited to, excuse me, $2,000 per year per designated beneficiary. So, you’re not able to put in as much for college savings. It does grow tax-deferred. The money comes out tax-free as long as it’s used for a qualified education purpose. So, there is some benefit to that. And then the last option, I think that’s out there for people is they could do an educational trust. The educational trust is nice because you can actually designate that money to be used for college or for trade school. You can have a third-party manage it. The money’s controlled. The downside is typically, you’re gonna pay a little bit higher tax rate on that money and you’ll probably pay a third-party to, kind of, administer it. But if you’re looking to make a larger contribution and guarantee that that money is gonna be used for college purposes, then a trust for college purposes might be something you look at.
Eric: Gotcha. That contribution limit that you talked about for both 529 and the custodial accounts, is that limited to the parents like the immediate parents of the child or can it, you know, because we talked about grandparents as well?
Keith: Sure. So, on a 529 plan, the account owner can contribute up to $75,000 or $150,000 for married couple per beneficiary in a single year without incurring a gift tax. Now, others can also do it. So, if I had parents and also grandparents making contributions, of course, we could contribute more. There are, in some states, maximum contribution amounts that are out there. And again, that’s gonna be on a state-by-state cases. With the custodial account, you can contribute up to $15,000 per person or $30,000 per couple. And in fact, that one there is really, kinda, more unlimited. So, if I had grandparents that each wanted to do $15,000, nieces and nephews that wanted to do $15,000, you could do that. So, you could really overfund one of those custodial accounts, but then again, you don’t get the tax benefits that you might in a college savings plan or in a Coverdell IRA.
Eric: Right? So, as you were listing each one of these out, you, kinda, touched on some tax benefits with each of them and what they could be used for. Is there anything more to those that you wanna talk about in terms of tax benefits and…
Keith: Yeah. Just going back to the 529 college savings plan, you know, depending on what plan you work with, you could have a state tax deduction for contributions that go into the plan. Again, the earnings grow tax-deferred, the money comes out tax-free as long as it’s used for a college purpose. And when I say college purpose, that could be your room and board, that could be your tuition, could be computers, it could be books. But as long as it’s a qualified education expense, that money will come out tax-free. And that’s probably, got the best tax advantages of any plan that’s out there. Of course, we always recommend that anybody looking at education plans really talk to your tax advisor first before making a commitment to one of these plans.
Eric: Yeah, absolutely. So, just out of curiosity, so, if, let’s say, you know, you’ve created one of these, maybe you started it early. Maybe you were really proactive and started, you know, when the child was born, you set up a 529 and you’ve been contributing this whole time and then they get to 18 and they don’t wanna go to school. What options do they have in terms of usage for that cash or does it just, they can take it out and it’s just gonna get taxed?
Keith: Yeah. So, I used to say, you know, if my child decided to get on the back of a Harley and ride off into the sunset and not go to college, what would I do with the plan? And actually, Eric, you’ve to understand a couple of different options you have. So, in the 529 plan, the account continues to be owned by an account owner, not the child themselves. And so, the child is actually a beneficiary. So, in cases like that, you can actually change the beneficiary on a 529 plan. And so, that’s one of the real big benefits of doing the college savings plan, the 529 college savings plan. So, you can change the beneficiary. So, I could simply take it from my daughter, change it to my son, or vice versa for my son to my daughter. So, that’s the real benefit there.
Now, on a couple of the other accounts like the custodial account, you can’t change the beneficiary. And actually, once that child turns either 18 or 21, again, depending on which state they live in, that money becomes theirs. So, you lose complete control over it. So, that’s a little bit tough. Now, with the Coverdale IRAs, what typically happens there is that the account owner, again, will be a third-party can change the beneficiary to somebody else just like you can on a 529. So, you still control the money until the child gets to the age. And then in the trust, typically, the trust will be governed by the document itself and it would say what would happen if the child didn’t go to college. But, you know, if the changing of beneficiary doesn’t work on the 529 plans, then you can still pull the money out. The only difference is you’ll pay taxes on those earnings and you’ll pay a 10% penalty for not being used for college purposes. So, you don’t actually lose the money, but you might have some taxes and penalties that will be charged against you.
Eric: Gotcha. Okay. So, parents, grandparents, anyone interested in setting up one of these types of accounts, where do they go to get that process started?
Keith: Yeah. You know, I think that the next steps are always the most important. And the thing is you can’t start too early. So, I would encourage everybody to sit down with your financial advisor. You know, our wealth advisors here at First United are well-versed in the different types of education plans that are available and can actually sit down and do a consultation to help you understand what your options are, and which option works best for you. And that’s where I would say that you start and, you know, typically, our wealth advisors are gonna work in conjunction with your CPAs to make sure that we get the best account and which one’s gonna work for either children or grandchildren. So, that’s where I would say you start and get the process moving forward and do it early too.
Eric: Right. All right. So, Keith, any final tips or thoughts for anyone preparing for upcoming educational expenses maybe, you know, coming in the next two years?
Keith: Well, no. I think the best advice is to start early. So, if you haven’t already started, now’s the time, you know, and like I said, if you’re starting late in the process, you might not be able to save enough to cover all the expenses, but it’s all those other expenses that, kinda, creep up that you don’t expect that, kinda, hits your heart. You know, the transportation, the computers, the books, the things you don’t expect. So, even if you’re late in the process, it’s not too early to start. Get started right away.
Eric: Great. Well, Keith, I wanna thank you for joining me today and providing such helpful insights. I really appreciate it.
Keith: Okay. Thanks for having me, Eric.
Eric: Yeah. So, and one last question for you. If any of our listeners would have a question, maybe it’s about education expenses or maybe it’s about, you know, other wealth-related challenges that they may be facing, or if they wanna learn more, what’s the best way they can get the support they need?
Keith: Two ways. They can actually visit our website at www.mybank.com/wealth, or even call straight into one of our wealth advisors, our wealth department. You can reach us at 1-855-829-7192 and any one of our wealth advisors stretching from Frederick all the way over to Morgantown are very capable and able to help you.
Eric: Awesome. All right. Keith, thanks again. I really appreciate it.
Keith: All right. Thank you. Have a great day, Eric.
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