As a parent, it’s likely that one of your dreams for your child is that she will go to college. After all, as Benjamin Franklin said, “An investment in knowledge pays the best interest.”
According to the 2017 Fidelity Investments College Savings Indicator Report, 72 percent of families are indeed saving for their child’s education. This is an increase from 58 percent in 2007, the first year of the study.
Whether saving or not, you may wonder how you’re doing or how to get started. Other questions may flood your mind: How much should I save? Is it too late? Where do I save funds? Who do I ask for advice?
THE CASE FOR SAVING
Student Loan Hero, an Austin educational consultant, reports that student loan debt is on the rise. In fact, at $1.48 trillion, the outstanding student loan debt in the US is sandwiched between the US average mortgage debt and total US credit card debt.
Establishing a college savings bucket gives your child a leg up. Every bit saved is a step away from the yoke of long-term debt as an adult. It’s proactive and prepares in advance.
Once you make the decision to save or if you’re currently reserving funds, it’s important to move forward with a plan. The foundation of this plan is to decide how much you would like to cover in college expenses. Depending on budget, some parents wish to fully fund a four-year, undergraduate college experience. This would encompass items like: tuition, fees, books, supplies, room and board. Others may only wish to cover tuition.
Next, target either a specific school or type of school for the projection. Perhaps the goal is becoming a Baylor Bear or attending a specific Ivy League institution. The chosen school can become the proxy, or representative, place to base savings on.
The “Find Your Future” search tool at bigfuture.collegeboard.org allows you to look up a specific college. For example, typing in “University of California: Los Angeles” will give various useful facts about UCLA. To find the cost of any school, look on the left-hand side and click “Paying.” To find generic average costs based on public, private, school size and so on, use the College Search tool and select “Type of School.”
The last piece of this puzzle is keeping inflation in mind. As an example, regular grocery shoppers realize that food prices increase over time. In 1985, with 80 cents, you could buy a dozen eggs or with $2.26, a gallon of milk. By 2017, shoppers spent an average of $1.47 for that same carton of eggs and $3.23 for milk.
Similarly, the cost of college grows over time — the price you see today will be larger in the future. The College Board’s Trends in College Pricing report says tuition for public universities, which increased by 6 percent during the 2008-2012 academic school years, now generally increases at around 3 percent annually. Ancillary costs (books, supplies, room, etc.) can often inflate at a different rate.
A SAVINGS SOLUTION
An appropriate savings vehicle will allow your money to drive at the right time. Out of the many ways to save, one option to consider is a direct-sold qualified tuition plan, authorized by Section 529 of the Internal Revenue Code, also known as a 529 savings plan.
Savingforcollege.com is a good spot to research these types of plans. Criteria to consider when comparing plans include viewing the minimum contribution, account maintenance fee and underlying investments fee. A financial advisor can assist you in determining an appropriate investment choice.
The rules for 529 savings plans are relatively straight-forward. Earnings grow tax-free. Funds can be used for “qualified education expenses” at an accredited school for items like tuition, fees, room, board, books and supplies (with a few specific stipulations).
Using the funds for non-qualified expenses will create a 10 percent withdrawal penalty plus ordinary income tax on earnings. Unused funds can generally be transferred over to another family member, but it’s a good idea to not overfund, or put in more than is needed. In case of scholarship, the 10 percent penalty is waived. If completing the Free Application for Federal Student Aid (FAFSA), a 529 plan owned by a parent could reduce a student aid package by up to 5.64 percent of the asset’s value. See a financial advisor for other guidelines.
HOW AN ADVISOR CAN HELP
As you can see, saving for college involves a lot of moving pieces! Looking at your entire financial picture and properly prioritizing other money goals are also crucial for the college part to work.
To help with an individualized analysis and for peace of mind, it advisable to consult with a financial professional. Finding one with the CFP, or Certified Financial Planner, credential confidently alerts you to a professional who went through rigorous steps and training. Find one at letsmakeaplan.org.
Fee-only planners, those who do not earn commissions by selling financial products, are CFP practitioners with a fiduciary responsibility to act in their clients’ best interest. Discover one at napfa.org.
Along with loving your child, pay the best interest by saving for college. Every bit that you can invest in your child’s future education is an investment for life.
Disclaimer: The information provided in this article is for general education and is not intended to provide tax, legal, accounting, financial or professional advice. Consult with a qualified professional for advice about your unique financial circumstances.
Daphne Jordan, CFP®, is a wealth advisor at Pioneer Wealth Management. She enjoys helping others reach and maintain their financial goals through a holistic approach.