By Jonny Lupsha, Wondrium Staff Writer
A surge in COVID-19 is upending college plans for students and schools alike, NPR reported. Many universities that had planned some kind of in-person education this fall are backpedaling in the wake of the continued first wave of coronavirus in the United States. Investing in higher learning comes with many risks.
NPR’s article on the fall 2020 college semester reports on the state of higher education during the novel coronavirus pandemic. “As the start of classes inches closer, more and more colleges are rolling back their earlier, more optimistic proclamations of an in-person or hybrid fall,” it said. “Those initial plans are now more likely to include hefty virtual options. Some call for classes that would be mostly remote, while others are calling for the semester to be entirely online.”
While the risk of contracting COVID-19 is new, the financial risks and payoffs of college are not. It may require planning, saving, seeking federal loans, and applying for grants.
Payoff of Getting a College Education
“The average income of a working high school graduate is $32,000,” said Dr. Michael Finke, Professor of Personal Financial Planning and Director of the Retirement Planning and Living Consortium at Texas Tech University. “This rises to $55,000 with an undergraduate degree. Rates of unemployment are also far lower for those with a college degree, and college-educated workers tend to have more generous fringe benefits on top of a higher salary.”
Dr. Finke said that the payoff from an extra year of high school education didn’t change much between 1980 and 2005, but it did change for those with an extra year of college education—and even more for those in a graduate program.
“Past studies on the return to education show that major is even more important than where you go to college in predicting future income. There’s also an increasing correlation between college major and profession, meaning that you’re more likely to move from a more specialized major into a job within that profession.”
529 College Savings Plan
College education doesn’t come without massive costs. Tuition makes up the bulk of college expenses, with room and board and textbooks following it. How can a family, much less a student, bear the brunt?
“The government provides a number of tax incentives to encourage people to save for education,” Dr. Finke said. “The most common is the so-called 529 plan, named after a part of the federal tax code. In a 529 plan, any money you invest can be taken out tax free if you use it for qualified educational expenses like college tuition, fees, dorms, and other school expenses.”
Dr. Finke said that a 529 plan is state-sponsored, so only the state can set up a 529. He also said that each state varies in investment options and fees, and they tend to hire an outside investment manager to handle the money. Fortunately—and strangely—enough, the 529 plan doesn’t always need to come from the state in which the applicant lives. However, it may come with its own set of setbacks.
“Nevada has a very low-fee investment option that may not be available in all states,” he said. “Your state may limit your state tax deduction if you use a 529 from another state, so you’ll need to check out the savings from better investment options versus your own tax savings.
“Many states do offer low-fee, passive investment options, and many 529s offer age-based investments that will reduce stock allocations in order to lower your level of risk as your child gets closer to age 18, when you’ll take out the funds to pay for school.”
The 2020-2021 school year may be in question due to COVID-19 spreading in the United States, but planning for college is an effort that takes years. If families with a college-bound member want to get their student off to the best start, they may not want to quarantine themselves from saving or seeking a 529 plan.
Dr. Michael Finke contributed to this article. Dr. Finke is a Professor of Personal Financial Planning and Director of the Retirement Planning and Living Consortium at Texas Tech University, where he leads the doctoral program-considered the premier academic program in financial planning. He has doctoral degrees in Consumer Science from The Ohio State University and in Finance from the University of Missouri.