Young people starting out in any industry can expect to face a difficult job market, particularly in today’s economic environment. However, a recent study by the Pew Charitable Trust shows that following the last recession, college graduates fared far better than high school graduates, experiencing less unemployment and more stable salaries. While the study does not factor in the cost of attending college, it does indicate that although the job market is difficult for young people, a college degree can greatly enhance their outlook.1
Another study by the Lumina Foundation and Georgetown University reports that since the recovery began, the economy has added two million jobs for workers with a bachelor’s degree, while nearly 6 million high school diploma-only jobs have been lost. The results reported indicate that, following the recession, the divide between college-educated workers and those with a high school degree has never been greater. Statistics from the study reveal that the unemployment rate for college graduates is 4.5%, while those with a high school diploma are experiencing a 24% unemployment rate.2
A Long-Term Investment in Future Earning Potential
Determining the long-term earning potential of a college degree and the premium it generally offers over a high school diploma is a calculation that should take into account lost earnings while in college, the actual cost of college and debt repayment. Another Pew Research Center’s study offers an analysis based on Census Bureau data, which estimates that an adult with a bachelor’s degree will earn an average of $1.42 million over a 40-year career, while a high school graduate will earn $770,000. Once the cost of college and lost income is factored in, the study projects an average earnings premium of $550,000 for those with a college degree.3
A sizeable earnings premium coupled with a significantly lower unemployment rate for college graduates offers a strong case for the long-term benefits of a college degree. Additionally, the study indicates that individuals who have a college degree are more likely to receive substantial increases in salary and progress further in their chosen career compared with those who hold only a high school degree.
Tax-Wise College Saving Options
There are many savings vehicles available that can be used to help offset the spiraling cost of a college education and provide important tax benefits such as:
529 Savings Plans: Earnings on savings can be withdrawn tax free for qualified higher education expenses. Contributions can be made by anyone, including grandparents, other relatives or friends. Annual contribution limits may apply depending on the plan, with total contribution limits per child generally maxing out at $300,000.4
Coverdell Education Savings Account: Contributions of up to $2,000 per child per year can be made until the child reaches age 18. Distributions are withdrawn tax free for any qualified education expenses including private school and equipment such as computers beginning with grades K-12 and post-secondary. Eligibility is based on MAGI (modified adjusted gross income) not earned income so if the parent’s income level is too high to qualify, a student can contribute to his or her own account.
Roth IRAs: Can be used to pay for qualified higher educational expenses (post-secondary) incurred by yourself, your spouse, your children or your grandchildren. Original contributions plus earnings can be withdrawn tax free and without penalty. If the funds are not needed for college expenses, the Roth assets can maintain tax-free growth potential for retirement.
It is important to note that some savings options can impact financial aid packages, while others will not. Please contact me if you would like to discuss your particular college savings needs and goals in greater detail.
1Source: Pew Charitable Trust Report, “The Rising Costs of Not Going to College,”www.pewtrusts.org, February 11, 2014.
2Source: Georgetown University Center on Education and the Workforce, http://www.luminafoundation.org, August 15, 2012.
If you’d like to learn more, please contact Bill Martin.