College Savings Plans
College Savings Plans
One of the most rewarding experiences in a parent’s or grandparent’s life is sending a child to college. But, college has changed in the last fifteen years.
Today, the cost of a higher education has skyrocketed beyond the ability of most parents to pay. In 2017, the cost of a state university will average $25,000 per year. Most private colleges start at $49,320 per year (Harvard, Stanford, & Duke, etc., are over $63,025 per year).
A good education comes at a price. And, the longer a student takes to complete their degree, the bigger that price tag gets. Fortunately, we live in a country that subsidizes college education. With subsidized loans, the government pays the interest while your student is in college. It helps. Still, a state-sponsored education comes at a cost. And this is where your college savings strategy helps.
Before you create your college financial plan, let’s go over some things.
1. Do You Have A Goal?
Saving for college is a priority for many parents. For many, it comes before their own retirement savings. As much as you would like to see your kids off to college, it shouldn’t be at the expense of your own financial future. Before you start saving for college, review your retirement plan. If you’re not on track you’re probably not in a good position to save for your kid’s college education.
If you have your money in order and you’re saving towards your short, mid, and long-term goals, that’s awesome. It’s time to do some digging. Most people overlook financial benefits they already have. Some employers offer tuition assistance. Over a cup of coffee with a local mortgage lender, Eric Gateman, says his wife’s employer will pay up to fifty percent of their children’s college tuition.
Make sure that one of your goals is to max out all options to reduce your kid’s college education price tag.
2. Where to Save?
The most common place to set up an account is the 529 College Savings Plan. It’s a great option. Just use it in moderation. You could end up with more money in the accounts than you have for qualified college costs. This could essentially trigger the very tax you were trying to avoid.
529 College Savings Plans provide us the opportunity to avoid taxes or lower taxes on the money put aside. You contribute to it using after-tax dollars.
The reason why the 529 plan is so great is because of all the tax benefits. Unlike retail investment accounts, you don’t pay taxes on the growth. And you don’t pay taxes when you take it out. But there is a caveat. You need to use the proceeds for your kids’ tuition, room & board, and other college-related expenses. The tax break could be thousands of dollars. You can learn more about ways you can spend 529 money on Forbes.
A note about investment fees. Higher fees and expenses can make a big difference in the value of your investment over time. Let’s say you invest $10,000 in a college savings plan with a return of 8 percent before expenses. With a plan that had an annual administration and operating expenses of 2 percent, after 18 years, you would end up with $27,880. If the college savings plan had expenses of only 0.65 percent, you would end up with $35,548—an additional $7,668.
Be a smart investor. Keep all that money for your kids. Open your account through your state. For most people, there’s a better income-tax deduction this way.
In my state of Connecticut, it’s called CHET (www.aboutchet.org). In New York, it’s NYSaves.org. To find your state’s 529 Plan, just Google it.
3. Borrowing For College
I’m not going to belabor the reality of student loan debt. I’d be willing to bet that you’ve read of stories about recent college grads burdened by a six-figure student loan debt -and either unemployed or working a remedial job. Maybe you know parents that can’t afford to send their kids to college because they’re still paying their own student loans.
As they’re all aware, borrowing for college is the easy part. A little too easy. Student loan debt is a rich source of revenue for private lenders. And if you don’t exercise some caution, you could end up in trouble.
I have seen graduates with interest rates as high as 14.5% with a private student loan balance of $70,000. Are you friggin’ kidding me?
Over time these numbers can add up. If you plan on borrowing for college, borrow as little as possible. Exhaust federal aid first. Then find loans with the best terms available.
4. Saving for College
The earlier you get your children on the college savings journey, the less debt burden they’ll have to carry when they graduate. Every dollar saved will work towards empowering your children to live their most expansive, expressive and creative life.
Let’s look into the mechanics of how to save.
Once you’ve set up your 529 College Savings Plans through your state, you’ll have to choose the investments for your accounts. While there are a variety of investment options to choose from, the simplest strategy would be to use the Age-Based options. Age-Based investment options automatically shift from aggressive growth to conservative investments as your child nears college. You can literally set it and forget it.
Next, set up automatic contributions to automate your success. If you need help figuring out how much to save, Vanguard has a free tool to help. By setting goals, identifying the right ways to save, and automating as much as possible, you can set yourself and your children up for the best possible future.