Today’s College Degree:
Still A Good Investment
As the cost of a college education continues to soar and consistently outpaces the rate of inflation, many wonder if the value of higher education is overrated. But college graduates still enjoy a sizeable earnings advantage, better earning potential and greater job security.
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 recent 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. The Pew Research Center’s study offers a current 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.1
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 $300,000.3
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, “How Much Protection Does a College Degree Afford,” www.pewtrusts.org, January 8, 2013.
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 Irene F. Stolarz
Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.
The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under such account.
Investments in a 529 Plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money. Investors should review a Program Disclosure Statement, which contains more information on investment options, risks factors, fees and expenses and possible tax consequences. Investors should read the Program Disclosure Statement carefully before investing.
Earnings on non-qualified distributions will be subject to income tax and a 10% federal income tax penalty State taxes may be applicable. Before investing, consider whether tax or other benefits or investments are only available in your home state 529 college savings plan.
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