Planning for Your College Savings Needs
The importance of higher education has only risen in the past decades, with more and more jobs requiring a college degree to even be considered. According to the U.S. Census Bureau, those with a bachelor’s degree will earn nearly twice as much over the course of their lifetimes as those who have only a high school diploma. This means that rather than facing the choice of whether children should attend college, more and more parents are instead faced with the decision of how they will pay for it.
Unfortunately, college doesn’t come cheap. Newsweek reports that college costs, averaged for public and private universities, now constitute 40 percent of the U.S. median household income (using 2012 data). However, that doesn’t mean that you’ll end up bearing the brunt of all 40 percent, or even that the percentage will be that high for your child.
With scholarships, grants, loans, and, most importantly, a solid college savings plan, you can greatly reduce the burden of paying for college. It appears that American parents are doing just this, as parents’ average out-of-pocket spending has actually declined from $8,752 in 2010 to $5,727 in 2013, according to Sallie Mae. Learn how to work with your TrueNorth Wealth advisor to establish a college savings plan that meets your financial needs.
The cost of college
When starting to consider a plan for saving for college, it can help to first look at college objectively to see what you’re facing. The “cost of college” will likely include:
- Application fees
- Campus visits
- Tuition and fees
- Room and board
- Food, entertainment, transportation, and other miscellaneous expenses
All things considered, according to the College Board, the total cost of a public, four-year institution for an in-state student in 2013 was $18,391; for an out-of-state student it was $31,701, and for a private institution it was $40,917. These numbers can give you a rough estimate of the maximum you would have to pay per year. However, depending on the age of your child, you should also consider the college inflation rate (which is usually higher than the standard inflation rate), which was between 3.2 and 3.7 percent from the 2012-13 to 2013-14 school years. Now that you have a general idea of college costs, you can begin to see how they’ll fit into your financial plan.
Determining your college costs
While tuition prices are fixed, your family’s specific financial characteristics, as well as your child’s college and career preferences, will have a huge effect on your out-of-pocket costs and your savings plan. To get a more accurate picture of your family’s specific college costs, consider the following:
- How many children do you have? Will they be in college at the same time?
- Is your family likely to qualify for financial aid?
- Do your children have exceptional academic, athletic or other skills that will likely garner them scholarships?
You should also consider discussing the following questions with your children to gain a better understanding of their college financial needs:
- How long will it likely take your children to complete school? Will you offer them incentives to graduate early?
- Will your children attend school at age 18? Do they want to take a gap year or spend some time working before entering college?
- Do your children want to attend a public or a private school? Do they plan to go to school in-state or do they dream of being far from home?
- Do your children plan to go on to graduate school?
- What type of careers are your children planning on? What will they major in? This can affect future earnings as well as choice of school, and can affect their ability to pay back loans, if loans will be part of your college payment plan.
- Would your children consider living at home during college to save on room and board?
- Will your children work part time before or during school to help pay for costs?
Once you answer some of these questions with your family, you will have better estimates to discuss with your TrueNorth Wealth advisor when discussing how much you will likely need to save for your children’s education.
Setting realistic savings goals
After considering how much you will need, you will have to start charting a path to get there. First, you should determine how much you want to contribute to your children’s education. While some parents want to relieve their children of any financial burden, others think it’s important for students to contribute to their own education. You will have to decide whether you want to fund as much of your children’s education as you can or whether you will contribute a set percentage or dollar amount toward tuition each year.
Next, you can work with your financial advisor to see how much you can realistically save and work toward setting a monthly savings goal. This savings goal should culminate in a total amount that you will have saved by the time your child enters school, considering factors like the power of compounding and market volatility.
The higher your income, the lower a percentage you will likely have to save each month. Your savings goals, therefore, will have to be adjusted as your income changes, and will vary based on other changes in your life. For example, if you have another child, you will likely want to start contributing to his or her education as well. Timing is also crucial—are you starting to save at your child’s birth? Or are you trying to make up for lost time as your child enters high school? All of these questions and more will determine not only how much you save, but also the way you save.
Options for college savings
Saving for your child’s education can be done in a variety of ways, depending on what works best with your financial plan. Consider some of the following options:
Qualified tuition programs. Also known as 529 plans, qualified tuition programs allow you a space for tax-free investment growth, provided funds are used for education. Prepaid tuition plans are another option offered by qualified tuition programs, allowing you to pay tomorrow’s tuition bill at today’s prices.
Savings/checking account. It always helps to keep some extra money in the bank, but you will likely want to use another form of savings as well, as these options provide little room for growth.
Investments. You can allocate a portion of your portfolio to college costs, but keep in mind that you will likely want to make your investments more conservative as your child reaches college age.
Retirement accounts. Retirement accounts may be attractive as college savings vehicles because they aren’t counted as assets for the federal financial aid calculation. However, retirement should almost always be prioritized ahead of college expenses, since your children may be able to receive loans or scholarships for college, which don’t exist to help you pay for retirement. Also, keep in mind that, depending on the type of retirement account you have, you may face taxes on withdrawals.
Coverdell accounts. Coverdell accounts are another type of account that allow tax-free growth for education expenses. However, they have a contribution limit of $2,000 per year, so you will likely need another form of savings to reach your goal.
Custodial accounts. Custodial accounts help you store money at your child’s tax rate rather than your own, up to a certain limit, which changes each year. While the custodian (you) controls the account and manages its investments, the beneficiary (your child) is the one who owns the assets, although he or she will not be able to access them until reaching age 18-21 (based on state of residency).
Remember—you don’t have to choose just one option for college savings, and often it’s best to have several funding sources. Sallie Mae’s “How America Saves for College 2013” survey found that, of families that are saving for college, 42 percent incorporated general savings accounts and CDs into their plans, 27 percent used a 529 plan account, 27 percent used a checking account, 23 percent relied on investments, and 17 percent used a retirement account. Your financial advisor can help you determine which options best fit with your financial plan, and how you can best use these options to maximize your college savings.