(Originally published in Living Safer Magazine)
As we raise our children the best we can, many of us overlook or procrastinate planning for college. And before I go any further, I will state that I’m a firm believer that not everyone is cut out for college. There are plenty of young adults who go to college out of a feeling of necessity or societal pressure. If maturity is at all an issue with your 16- or 17-year-old, be sure to take the time to consider a gap year. Studying abroad or volunteering for a year can be a great experience for a young adult, and it gives them a much-needed year or maturity, growth, and perspective.
I was the first person to go to college in my family, and the costs associated with it were an ongoing family discussion. Now, in giving clients advice about savings and financial planning associated with college, I generally keep to a few simple guidelines.
First, I think every parent owes it to their child to make him or her think about how college is going to be paid for. You could simply write checks for four years, and your offspring might never appreciate the cost or the effort that went into saving those monies after tax. I believe that expecting your children to strive for a scholarship or to apply for loans is a great first impression in the world of finances. Many parents don’t want to see their kids strapped with debt, and I agree, but the process of applying and seeing those loan payments come due can shape habits and form responsibility that will influence the way your children behave towards finances moving forward.
When loan payments come due, this is the perfect time to leverage those savings you’ve accumulated and pitch in to help pay your children’s debt down. This process has an incredible beneficial maturing effect:
- Your son or daughter will appreciate what you have just done, or might contribute to do if you are helping them on a monthly basis, and
- If and when they can start paying their payments on their own, you can step in to pay the balances off, or help them with their first mortgage.
My opinion is that, if you are able to save a bit for your child’s future, it is better to give them this gift when they are later in their twenties. Also, those young adults who don’t have the expectation of having everything paid for may seek out grants, scholarships, and other sources of funding a little harder if they actually believe it’s all going to be on their own dime.
Regardless of your approach, having the assets set aside to give to your children is important, giving you the option to help them or not. Choice is wonderfully empowering. Just like with an investment opportunity, you can never start too early. Starting college savings plans on a monthly basis should begin when your son or daughter is born, and grandparents and other family members should be encouraged to fund these accounts on their birthdays. Time is your best weapon for accumulating enough to make a difference. A parent who beings investing $100 a month at birth should, on average, have saved almost $97,000 by the time their child reaches the age of 23 – given a modest seven percent net if fee return. That’s one dinner out a month, for cases of good beer, a trip to the movies for four people, or numerous other small luxuries that could be eliminated. Establishing a way to make these deposits automatically is key so you won’t even think about it.
Savings vs. after tax equities
An obvious place for college savings is in a UTMA (Uniform Transfers to Minors Act) savings account, a joint securities account held with you and your child. You can tailor the investments to be as conservative or aggressive as you want based on the time horizon you have. Beware though, these accounts typically convert to the child’s name at age 18 and may not be actually ever spent on college tuition.
For parents starting in the ages of 14 to 18, I think it’s best just to open a separate brokerage account in your own name, pay long term capital gains, and take withdrawals from the accounts when tuition bills come due. You will need to keep in mind the short duration, eight to ten years, and therefore you may not invest in the same manner as your 410K, for example. If you have started early enough or have multiple children, then the 529 plans available throughout the country can be a good fit.
Finding a good plan
States typically offer a direct plan, and 32 states offer a tax deduction for contributions. The Vanguard 529 State Tax Deduction Calculator is a great simple tool to determine your tax savings given a ballpark contribution.
An out-of-state plan with low fees may not beat your in-state 529 plan that gives you a deduction. If you like in Pennsylvania, Kansas, Arizona, Missouri or Montana, you can get the tax bread regardless of where you invest. Morningstar 529 plan center offers guidance on direct sold plans. If you are fee conscious, and you should be, New York State 529 centers around low-cost Vanguard Index Funds. Their Value Stock index portfolio charges a mere 0.16 percent, allowing all of those potential returns to accumulate net of fee.
Some good resources
If you are new to this equation, www.savingsforcollege.com and www.finaid.org are great resources – knowing where you need to get to can help with your long-term planning. The 2017 estimates for in-state vs. out-of-state private tuitions range from $10,000 a year all the way to $60,000. With inflation factored in, you may need $125,000 for your 10-year-old and $200,000 for that late addition.
Take into consideration that the average student goes to undergraduate for 4.9 years, so don’t automatically assume you’ll be done in four years.
Just like my parents told me – if you don’t get a scholarship, you should figure out how to pay for it yourself. Maybe they were just bluffing, but I’m glad I didn’t have to find out.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).