By Clifton E. Clark, JD, MBA

Financing College A Primer Feature BB&T Perspectives

College expenses and associated debt are becoming a more prominent concern for families of all income levels. The headlines are everywhere: The Wall Street Journal recently published an article named “College Debt Hits Well-Off;” Forbes recently published a similar article, “How Families End up with Massive Student Loan Debt;” and Bloomberg even went as far as to recently publish an article titled “How Student Loans Could Cripple the U.S. Economy.”

Unfortunately, it’s not just the cost of tuition students, parents and other family members must consider. There are also the rising costs of other necessities to consider, such as meal plans, housing, transportation and extracurricular activities. Finally, there are the continuing trends of gap years (a year taken off between high school and college), studying abroad and spring break. This is not to say that all news on the topic of college expenses is bad, as there are still many options for financing college education. There are two prominent strategies to consider for college expenses: financial planning and borrowing.

Financial Planning

If your timeline allows for a financial planning option, the process should not be considered in a vacuum. College expenses are a very large and important part of a family’s financial future, but they are only one part of the financial and estate planning process. Generally, there are three funding resources when planning for college expenses: scholarships, gifting options and saving options.

1. Scholarships – Qualifying students have many opportunities for scholarships. Some of the available scholarships are need based and others are merit based. Some of the best websites for researching college scholarships include: Cappex (www.cappex.com), Fastweb (www.fastweb.com), CollegeNet (www. collegenet.com) and Niche (colleges.niche.com).

2. Gifting Options – For 2016, the Internal Revenue Service allows each individual an annual exclusion gift of $14,000 per person or $28,000 per couple to another person without impacting the cumulative lifetime exemption. In addition to the annual exclusion, parents or other family members can pay for education expenses without impacting their cumulative lifetime exemption, so long as the payments are made for tuition and are paid directly to a qualifying institution.

3. Saving Options – There are also different ways to save money for college, the most notable of which are:

  • 529 Plans – The 529 plan is named after the section of the Internal Revenue Code from which it was granted tax-advantaged status. Contributions grow tax deferred, and withdrawals are tax free if the funds are used for qualified education expenses. Qualified education expenses include tuition, books, supplies, equipment, fees and room and board. Funds can be used at any college or university accredited by the U.S. Department of Education. There are many investment options managed by designated fund companies. The beneficiary of an account can be changed if desired.
  • Coverdell Education Savings Accounts – Coverdell Education Savings Accounts were previously called Education IRAs. These accounts are similar to 529 plans in that the money in them grows tax deferred, and withdrawals are tax free if the funds are used for qualified education expenses. There are, however, some differences. First, annual contributions to Coverdell accounts are limited to $2,000. Second, Coverdell accounts can also be used for primary and secondary schools, not just colleges. Finally, Coverdell accounts have more options for investment. The accounts must be funded with cash; however, the cash can be invested into individual stocks and bonds versus the designated funds available in 529 plans.

Borrowing

If the time horizon does not allow for a planning solution, or if the amount saved is not enough to cover the full cost of higher education, there are multiple borrowing solutions.

Federal Student Loans

  • Direct Loans (subsidized and unsubsidized), through the U.S. Department of Education under the William D. Ford Program
  • PLUS (Parent Loan for Undergraduate Students) Loans
  • Perkins Loans (subsidized)

Children from families with high net worth or income generally do not meet the criteria for subsidized federal student loans. An advantage of subsidized loans is the borrowing student does not have to make interest payments while attending school. Unsubsidized loans do still have advantages, as the interest rate can be fixed for the duration of the loan, but the borrower must pay interest while attending school.

Private Loans

  • Loans specific for education and
  • Loans that are used for general personal purpose

Because of the flexibility and low borrowing costs, many families may use the equity in their homes or borrow against their investment accounts to fund college expenses. At institutions like BB&T, these lines of credit or loans can be tailored to match the actual borrowing needs and timing of the individual borrower.

It is never too soon to start planning if you have a child or grandchild who will one day go to college. Your BB&T Wealth advisor can help you plan and learn more about college financing options.

By Clifton E. Clark, JD, MBA

Financing College A Primer Feature BB&T Perspectives

College expenses and associated debt are becoming a more prominent concern for families of all income levels. The headlines are everywhere: The Wall Street Journal recently published an article named “College Debt Hits Well-Off;” Forbes recently published a similar article, “How Families End up with Massive Student Loan Debt;” and Bloomberg even went as far as to recently publish an article titled “How Student Loans Could Cripple the U.S. Economy.”

Unfortunately, it’s not just the cost of tuition students, parents and other family members must consider. There are also the rising costs of other necessities to consider, such as meal plans, housing, transportation and extracurricular activities. Finally, there are the continuing trends of gap years (a year taken off between high school and college), studying abroad and spring break. This is not to say that all news on the topic of college expenses is bad, as there are still many options for financing college education. There are two prominent strategies to consider for college expenses: financial planning and borrowing.

Financial Planning

If your timeline allows for a financial planning option, the process should not be considered in a vacuum. College expenses are a very large and important part of a family’s financial future, but they are only one part of the financial and estate planning process. Generally, there are three funding resources when planning for college expenses: scholarships, gifting options and saving options.

1. Scholarships – Qualifying students have many opportunities for scholarships. Some of the available scholarships are need based and others are merit based. Some of the best websites for researching college scholarships include: Cappex (www.cappex.com), Fastweb (www.fastweb.com), CollegeNet (www. collegenet.com) and Niche (colleges.niche.com).

2. Gifting Options – For 2016, the Internal Revenue Service allows each individual an annual exclusion gift of $14,000 per person or $28,000 per couple to another person without impacting the cumulative lifetime exemption. In addition to the annual exclusion, parents or other family members can pay for education expenses without impacting their cumulative lifetime exemption, so long as the payments are made for tuition and are paid directly to a qualifying institution.

3. Saving Options – There are also different ways to save money for college, the most notable of which are:

  • 529 Plans – The 529 plan is named after the section of the Internal Revenue Code from which it was granted tax-advantaged status. Contributions grow tax deferred, and withdrawals are tax free if the funds are used for qualified education expenses. Qualified education expenses include tuition, books, supplies, equipment, fees and room and board. Funds can be used at any college or university accredited by the U.S. Department of Education. There are many investment options managed by designated fund companies. The beneficiary of an account can be changed if desired.
  • Coverdell Education Savings Accounts – Coverdell Education Savings Accounts were previously called Education IRAs. These accounts are similar to 529 plans in that the money in them grows tax deferred, and withdrawals are tax free if the funds are used for qualified education expenses. There are, however, some differences. First, annual contributions to Coverdell accounts are limited to $2,000. Second, Coverdell accounts can also be used for primary and secondary schools, not just colleges. Finally, Coverdell accounts have more options for investment. The accounts must be funded with cash; however, the cash can be invested into individual stocks and bonds versus the designated funds available in 529 plans.
Borrowing

If the time horizon does not allow for a planning solution, or if the amount saved is not enough to cover the full cost of higher education, there are multiple borrowing solutions.

Federal Student Loans

  • Direct Loans (subsidized and unsubsidized), through the U.S. Department of Education under the William D. Ford Program
  • PLUS (Parent Loan for Undergraduate Students) Loans
  • Perkins Loans (subsidized)

Children from families with high net worth or income generally do not meet the criteria for subsidized federal student loans. An advantage of subsidized loans is the borrowing student does not have to make interest payments while attending school. Unsubsidized loans do still have advantages, as the interest rate can be fixed for the duration of the loan, but the borrower must pay interest while attending school.

Private Loans

  • Loans specific for education and
  • Loans that are used for general personal purpose

Because of the flexibility and low borrowing costs, many families may use the equity in their homes or borrow against their investment accounts to fund college expenses. At institutions like BB&T, these lines of credit or loans can be tailored to match the actual borrowing needs and timing of the individual borrower.

It is never too soon to start planning if you have a child or grandchild who will one day go to college. Your BB&T Wealth advisor can help you plan and learn more about college financing options.

About the Author

Clifton E. Clark

Clifton E. Clark

Senior Vice President, Wealth Lending Strategy Manager

Clifton joined BB&T Wealth in 2010 and serves as the BB&T Wealth Lending Strategy Manager. Clifton brings 10 years of corporate banking and wealth lending experience to his role. Clifton received his bachelor’s degree in economics from the University of Virginia and his J.D. and M.B.A. degrees from West Virginia University.