It can pay to start at a community college
Readers continue to write to us with questions about financing college, including how best to use “529” plans, the tax-advantaged higher-education accounts that invest in mutual funds. We asked experts to help answer this month’s questions.
Does it pay to go to community college for the first two years, and then transfer to a four-year school?
Starting at a community college is more popular than you might think. Of the students who graduated with a bachelor’s degree from U.S. institutions in 2016, 49% had attended a community college, and two-thirds of those did so for three or more terms, according to National Student Clearinghouse data.
As to whether it makes sense, “it depends a lot on what a student’s goals are following the bachelor’s degree,” says Melinda Salaman, director of strategic research at higher-education consulting firm EAB. It’s important to research career outcomes, including what your expected salary trajectory will be, before you decide what sort of degree to pursue and what sort of school to attend, she says.
How much cheaper is community college? In-state residents paid nearly three times as much, on average, for tuition at a four-year public college compared with a two-year public college in the 2015-16 academic year, College Board figures show. So if a student starts at a local community college for two years at a cost of $3,400 annually (in tuition and fees), and then transfers to a four-year in-state school at a cost of $9,400 annually, he or she could shave roughly $12,000 off the cost of a bachelor’s degree (not counting room and board).
From a dollars-and-cents standpoint, earning some credits at a community college would certainly seem to pay off, says Mari Adam, a fee-only financial planner in Boca Raton, Fla.
Community college may make the most sense for students who can live at home, those who need to overcome poor high-school academic performance and those four-year students who take cheaper community-college classes over the summer to save money, Ms. Adam says.
But be sure to confirm that the credits you earn will transfer to the four-year school you plan to attend, or you will have wasted both time and money, she says.
To that end, some community colleges have formal arrangements, called articulation agreements, with in-state four-year colleges that allow credits to transfer easily between the two institutions.
But it is also possible to transfer community-college credits to private schools, including elite institutions. For example, students who participate in the rigorous American Honors program at certain community colleges can apply to transfer to top schools like Duke University, Wellesley College and the Massachusetts Institute of Technology.
Keep in mind that transfer students may pay a price for entering a four-year school after freshman year, since they will have missed out on some important social aspects of college, including extracurriculars and relationships with professors and students.
Still, “lots of students do this and find the trade-off is worth it because of the finances,” Ms. Salaman says.
I would like to reward employees by starting 529 accounts for their children that will vest after 10 years of the parents’ employment at our company. Is this possible?
Yes. Because a 529 is funded with after-tax money, the main advantage of a workplace payroll-deduction 529 account is convenience for the employee.
In terms of vesting, you are allowed to set any restrictions you wish on a workplace plan as long as you follow the IRS rules regarding 529 accounts, says Alabama State Treasurer Young Boozer III, who chairs the College Savings Plans Network.
“Employers may contribute a match or add additional funds, but the employee will be taxed on these amounts, which are considered income to the employee, unless the employer makes arrangements to pick up the IRS tab,” Ms. Adam says. Some states, including Nevada, give tax credits to employers who offer 529 plans and match employee contributions, she says.
Before launching your program, call the 529 plan administered by the state where your company is based to see if there are any other state incentives that could benefit your employees, Mr. Boozer says.
When paying my child’s tuition, I first paid the college myself and had our 529 plan reimburse me. Then I read that I should instead have the check sent in my child’s name, so when I made a withdrawal from another one of our 529 plans, I did that. Will this affect our taxes?
You are allowed to have the check made out in either name, so you have done nothing wrong. “Essentially, the tax consequences, if any, are applicable to the payee of the check, as they received the 1099,” Mr. Boozer says. If you used the withdrawal for qualified educational expenses—tuition, books, mandatory fees, room and board, computers and related costs—you won’t have to pay any taxes. If the money went toward something else, you’ll have to pay taxes on any gains, plus a 10% penalty (you won’t owe anything on the portion of your withdrawal that represents your contributions to the account).
“One caveat: If at any point you do end up with a taxable 529 distribution, either because you withdrew too much, or withdrew the wrong year, or withdrew funds to cover nonqualified expenses, it is usually beneficial tax-wise to have that withdrawal reported to the student, who’s probably in a lower tax bracket, rather than to the parent,” Ms. Adam says.
As I understand it, computers are only allowed as a 529 expense if the computer is listed as a requirement by the college. Is that correct?
No. As of Jan. 1, 2015, you can use 529 money to buy computers and related equipment even if the school doesn’t require it. What’s now covered: the purchase of any computer technology such as laptops, desktops and even iPads, related peripheral equipment such as printers, computer software used primarily for educational purposes, and related services such as internet access if used by the beneficiary of the 529 plan during any of the years the beneficiary is enrolled at an eligible educational institution, Ms. Adam says. Ms. Adam recommends keeping your receipts in case the IRS asks about them, and matching your 529 withdrawals to the same year you bought the computer equipment.
Which should my college-bound daughter use for next fall’s expenses, her own UGMA [Uniform Gifts to Minors Act] 529 in her name, or a 529 plan her father owns and of which she is the beneficiary?
It is up to you, but the parental 529 has more flexibility, allowing you to change the beneficiary or stretch out the plan to cover graduate school. The UGMA 529 becomes your daughter’s when she reaches the legal age, and at that point, she can do what she pleases with the money, without your input. For this reason, you might want to deplete the UGMA 529 for educational expenses first, Ms. Adam says.
Note that as long as your daughter is considered a dependent for the purposes of financial aid, both of these accounts are deemed a parental asset when aid is calculated—even if your daughter has reached the termination age for her UGMA 529, which is usually 18 or 21, and owns that account outright. If she’s considered an independent student, the UGMA 529 is counted as a student asset. (This is different from the rules governing regular UGMA or UTMA accounts, such as savings or brokerage accounts. Those are considered student assets regardless of the student’s age or dependent circumstances, Ms. Adam says.)
I set up 529 accounts for all five of my young grandchildren, but realistically I may not be alive when they are old enough for college. Who will own the accounts when I am gone? Will that person be able to change the beneficiary on the accounts in case one or more of the children doesn’t go to college?
“Most plans allow the owner to name a successor in the event of disability or death prior to the beneficiary needing the savings,” Mr. Boozer says. Naming a successor is a smart idea so the account doesn’t get tied up in probate.
Once you are no longer alive, the successor account holder “gains the power to do anything you can now do as owner, including changing the beneficiary or withdrawing all funds, so choose wisely,” Ms. Adam says.
Our children’s 529s don’t have a cash or money-market option. As our children are in their teens and, thankfully, we’ve made plenty in the stock market’s run-up since 2008, we want to move the funds into cash rather than risk losing our gains to a market decline. Can I switch the money to a different fund company that does offer cash as a plan option?
Yes. First, check the rollover provisions in both the old and the new plans to make sure you understand what the rules and fees are, Mr. Boozer says. You may also want to give your existing plan a call to make sure no suitable option is available before moving your money, he says.
Note that the IRS allows only one tax-free rollover of a 529 account per beneficiary in a 12-month period, Ms. Adam says.
“If you received a state tax deduction when you originally contributed funds to the plan, be aware that later moving the funds to an out-of-state plan might trigger some form of tax recapture, so read the rules and fine print carefully before proceeding,” she says.
I am interested in earning a project-management certificate. Are the costs for a workshop, test-preparation course and the certification test considered legitimate 529 expenses? Can I set up the 529 so that I am the beneficiary?
Yes, you can set up a 529 for your own benefit. But whether the expenses you mention are eligible for 529 money depends on whether the institution where you take the course is eligible for federal student aid, Ms. Adam says. You can check on the Education Department website.
Even if your institution is eligible, you’ll have to make sure the expense itself is required for enrollment or attendance at the school. Test-prep courses you need to apply—such as SAT prep—don’t qualify because they precede enrollment, she warns.