Speaker 1:
As a bank that focuses on business, we work with business leaders all day, every day. We have a front row seat to what's working and what has potential. The First Business Bank podcast is dedicated to sharing insights to help you work better, smarter, and faster to achieve your goals. Let's get into the show.
Brendan Freeman:
Welcome to the First Business Bank podcast. I'm Brendan Freeman, and I'll be your host for today's episode about strategies for paying for higher education. To help explore this topic further, I have wealth advisor Anthony Ursetti with me today. Anthony, would you mind introducing yourself to our listeners?
Anthony Ursetti:
Sure. Thanks, Brendan. My name is Anthony Ursetti, wealth advisor here at First Business Bank. I've been with the bank for a little over four years now, and I've been in the industry for about 20 years.
Brendan Freeman:
Wonderful. Well, we're glad you're here. Why don't we just jump right in? Talking about higher education, and with so much concern today about inflation in so many elements of our life, can you share with our listeners some information about the rising costs in higher education?
Anthony Ursetti:
Yeah, absolutely. The cost of college tuition, and the cost of higher education in general has gone up four times the rate of regular inflation since the turn of the century. So, as we take a look at where we are now, and going into the future, there's no signs of that actually decreasing in the near future. So, that is obviously something that is top of mind for most families, and putting a plan, and identifying some different ways to pay for college, and fund that education is something that is very worrisome to many families.
Brendan Freeman:
In your role as a financial advisor, I know you do a lot of that work, doing financial planning, and trying to project those potential costs, and so with that rate of increase every year, I'm sure that's significant, and like you said, I'm sure that can be very worrisome for individuals as they're trying to do that planning work.
Anthony Ursetti:
Yeah, absolutely.
Brendan Freeman:
Okay, so Anthony, let's put ourselves in the minds of parents, and perhaps even grandparents who are considering the costs of higher education for their kids, and their grandkids. What would you suggest might be a good first step for those individuals along with their students that are in high school, maybe approaching the end of high school, and starting to consider what the next chapter looks like for them? What would you suggest some best practices might be there?
Anthony Ursetti:
Yeah, the first thing you want to do is determine what type of school that you're going to be attending. So, for example, a four-year private school in 2022 and going into 2023, the average cost of that is roughly $39,000 a year. So, really, determining what type of school, whether it be a private, a public school, a two-year university, whatever it might be, is ... Really, trying to identify what those tuition costs might be is really the first step.
The next step would be to fill out a FAFSA form. For whatever reason, there's many students who do not fill out that form or at least completed in its entirety. And it's not just for lower income, it's really for any student who's going to be attending higher education or university in the near future. So, filling out that form in its entirety, and I would recommend as parents filling that out with your child as well, because they're going to ask for a lot of information, such as tax returns, and so forth. So soon as you enter senior year of high school, getting that form submitted is really the first step.
The next step is really to identify some scholarships and grants that are out there. In 2022, there were something like $34 billion in scholarships, and grants available to students, and less than half of that was actually utilized. There's some different sites you can go on to search for those. We can get into that in a little bit here, but making sure that you're maximizing all the scholarships and grants that are available to you. And this could be from religious organizations, civic organizations, state, local government, private companies as well. So, there's a lot of available resources. It's just about planning, and making sure that you're using all the resources that are available to you.
Brendan Freeman:
Yeah, it seems to me the knowledge is power there in trying to explore all the different avenues. You'd hate to see money being left on the table. And so exploring all those different options, making sure that you fill out that FAFSA form, and even if you think that you're not going to be eligible for some type of assistance, it's worth trying, I would guess.
Anthony Ursetti:
Absolutely, yeah, absolutely.
Brendan Freeman:
Especially with the rising costs.
Anthony Ursetti:
Yeah.
Brendan Freeman:
Wonderful. Speaking of that, what are some specific strategies, thinking a lot about our first business bank client base for small business owners who'd like to fund their child education? Maybe there's some different things as a business owner that might apply to you that might be relevant that we'd want to share.
Anthony Ursetti:
Yeah, that's a great question. So, there are many different creative ways to help your child save for college as they are still in school, still in high school, or even in grade school. One option would be to hire your child as an employee of your company. There's no age limit on that, obviously. There are labor laws, and so forth that you have to abide by. But as far as hiring your child, paying them a salary each year, you could pay them up to $12,000 per year in 2022 without that money being taxable to them, either federal or state. And then, as a business owner, you can use that as a tax write off as well. And then, also as you pay your child a salary each year, first, they're able to learn how to save money, put that money away for college. They can also start a Roth IRA at a younger age as well, since they do have earned income. So they could start the process of saving for college while they are working for you. So, that's a great step that a lot of business owners tend to go with.
Another option is a gift lease agreement where you're able to gift property or land to your child at a certain age, and then you would actually pay them rent or whatever the lease agreement is. So, that would provide them with income, and then also you're able to write that off as far as the lease payments as a business expense as well. So, those are a couple of really good options for business owners.
Another one would be to take out permanent life insurance. So, some of our wealthier clients, some of our business owners, it could be a good idea to take out permanent life insurance, so that's going to build up cash value for them. You're also able to use that, not necessarily just for college education. So, if your child ends up not going to school, you still have that cash value within that policy. They can use it for other expenses as well. So, having a permanent life insurance policy in place is not suitable for everybody, but it could be an option for some wealthier clients, and some business owners. The one drawback with that is the fees that you're going to end up paying for most insurance policies. So, that's something you want to always keep in mind as well.
Brendan Freeman:
You really want to be aware of that. It sounds like that gives some flexibility, but there might be a cost to it, and the cash value can be used for higher education expenses?
Anthony Ursetti:
Yeah, that cash value can be actually be used for anything, so it doesn't have to be earmarked for higher education. It can be really used for anything. And then, it also provides a death benefit as well. So, it's more diverse than some of the other ways to fund college education, but again, it could be probably the most expensive way.
Brendan Freeman:
I might suggest for our listeners that if this sounds interesting, but you don't necessarily understand all the components of it, this is something where First Business Bank, and our team can help to give some advice, as well as talking with your accountant from a business perspective, from a personal perspective. Because there might be advantages or disadvantages of any one of these strategies for you, and you'd want to make sure that it is customized to your specific situation.
Anthony Ursetti:
Yeah, absolutely.
Brendan Freeman:
Well, we alert alluded to this earlier, and we're talking a little bit about parents, and maybe this question might be a little bit more about grandparents. Can you share some insights specifically on paying for education, and maybe some tips paying for that education, the higher education for parents or grandparents?
Anthony Ursetti:
Yeah, absolutely. So, I've worked with quite a few parents and grandparents who want to fund their child or their grandchild's higher education. It's very important to them. They've saved up money, or investments, and stocks over the years. So, gifting cash or stocks to your child or grandchild is something that many of our clients tend to do. The one limitation with that is the annual gift tax exclusion. For individuals, it's $15,000 a year in 2022, and then for couples it's $30,000 a year. So, if you were to exceed that, then you would have the annual gift tax that you would have to pay on that. So, that is the one drawback. A workaround that you can use for that would be to pay the institution directly. So, there's grandparents who pay every month or every quarter. They will actually get the bill for their grandchild's education or for directly from the school, and they'll make that payment directly to that institution. The benefit of that is they know exactly where that money is going, and then there's no need to worry about the annual gift exclusions amounts on those.
Brendan Freeman:
Sure. Yeah, you don't really mess with gift taxes at all if you're paying directly to those institutions. So, that's a great tip.
Anthony Ursetti:
Yeah.
Brendan Freeman:
Along those lines, saving for children's education and thinking about investments as they relate to that topic, 529 plans come up quite a bit. Can you talk about using 529 plans to pay for education?
Anthony Ursetti:
Yeah. 529 plans are the most common way to fund college education for your child or grandchild. You can really start as early as when they're born. As soon as they have a Social Security number, if you want to start that process, and start funding their college education. Many clients we work with, that's important to start from the beginning, because that money's going to grow over time. So, the sooner the better.
The 529 plans, it's going to be tax deferred growth in those accounts. As long as the funds are used for educational expenses, then there's no tax liability on that. If for some reason, that child does not end up going to college or using it for higher education, your two options are really to transfer that to another child, or another grandchild, or whoever it might be, which you're able to do. Or if you decide to withdraw it, there is a 10% penalty that you would have to pay. And then, also, that any growth in the account would have to be claimed on your regular income taxes as well. So, there are some limitations with it, but it is definitely the most common way to fund college education, the 529 plans. You can contribute a lump sum as well. So, $15,000 a year is the annual contribution limit, but you can contribute up to five years at one time. So, for an individual, $75,000, you can contribute to a child, and for couples, $150,000 is the maximum.
Brendan Freeman:
Well, we may have some clients sometimes that will have grandchildren that they make those larger lump sum investments early on, and then they have all those years of compounding.
Anthony Ursetti:
Yeah, absolutely. Yeah, and typically, they'll invest in what's called a target date fund for when the child turns 18. So, those type of funds will get more conservative as far as the type of investments as they get closer to college age.
Brendan Freeman:
Sure.
Anthony Ursetti:
So, it automatically will rebalance those funds for you, which is great.
Brendan Freeman:
Lots of good options, and lots of good things to think about. And certainly anytime you can get tax free growth, that's a really good benefit of a 529 plan, and being able to pass that within members of the family also is another benefit.
Anthony Ursetti:
Yeah, absolutely.
Brendan Freeman:
Well, Anthony, we've covered a lot of really good topics, and tips today. Any final thoughts for our listeners?
Anthony Ursetti:
Work with a financial planner, if you have a wealth advisor you work with or a financial planner you work with. There's so many different options that are out there. We just covered a few of them, but if you sit down with the financial planner, go through some of those options. And then also, make sure you're prioritizing as parents your own retirement prior to prioritizing or funding your child's education. That's obviously very important to make sure that you're on the right track for retirement, and that you have the right type of accounts and plan in place. And then, funding your child's education should always be secondary, but obviously it's very important. So, work with a financial planner to really go over all the options that are available to you, and then make sure you're on the right track as well.
Brendan Freeman:
Wonderful. Great advice. And I know you've got a lot of experience working directly with individuals, couples, families, on these types of issues.
Anthony Ursetti:
Yeah.
Brendan Freeman:
Well, I want to thank Anthony Ursetti for participating in this discussion with me today. I also want to thank our audience for listening. I want you to be aware that FirstBusiness.bank has a lot of resources like this podcast, like other information that might be very helpful for private wealth clients, for business owners, for leaders in our communities. We invite you to experience the advantage of First Business Bank, and if there's any way that we can help, please reach out to us.
Speaker 1:
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