Tuition Doesn’t Grow on Trees: Tips for Parents on Saving for College
By David McClellan
Most parents struggle with how to prioritize saving for a child’s college education and their own retirement savings goals. While as a parent, your first instinct may be to focus on funding college savings, you should first consider how you’re doing on your retirement savings goal. These goals are competing for the same dollar, and while you (or your child) can usually get a loan to pay for college, no one is going to give you a loan to pay for your retirement!
Understand How Your College Savings Goal Stacks Up to Reality
Start by thinking more deeply about your actual college savings goal.
- Do you want to fund 100% of college expenses or just some of the costs required to attend?
- What percentage do you want to fund?
- How important is it that your child help pay for college so they have “skin in the game”?
One popular way to frame the goal is to ensure that your child graduates debt-free. Rather than paying down debt for years, your new graduate can immediately start saving once he or she enters the workforce.
You’ll also want to consider whether your savings goal will fund your child to attend a public or private school. For example, for the 2015–16 year and assuming in-state tuition, all-in expenses at The University of Texas at Austin (UT Austin) were estimated at $26,322.1 In contrast under the same assumptions, all-in expenses at Princeton University were estimated at $61,160.2 Over the past 10 years, the annual rate of inflation of college expenses has been about 5%, which is significantly higher than the overall rate of inflation.3
Those numbers can feel very scary, but the good news is that if you start saving when your child is young, time is on your side. If your goal is to pay 80% of college expenses in 18 years and you start saving today, you’d need to save $497 per month to reach the UT Austin goal and $1,154 per month to reach the Princeton goal (assuming college expenses rise 5% annually and you earn 7% annually on your investments).4
Save for College With a 529 Plan
Once you know your goal, what’s the best way to save for it? For most families, a 529 savings plan makes the most sense. Unlike prepaid tuition plans that may limit students to in-state public schools, a 529 plan offers the flexibility to attend virtually any college. You can contribute up to $14,000 annually to the account from each parent with an option to accelerate five years of contributions into a single year. The account defers taxes until money is withdrawn, and withdrawals are tax-free as long as they pay for qualified college expenses, which even include additional items such as laptop computers and internet service.
Most states sponsor their own 529 plan, and many plans offer an in-state tax deduction on your contributions. For example, if your state of residence taxes income at 3.00% and you contributed $10,000 to the in-state plan, you’d be eligible for a deduction of $300 on your state income tax return.
While the state tax deduction can be appealing, you should look closely at the 529 plan expenses and investment options. Many state plans are expensive and/or have limited investment choices. As a result, an out-of-state plan may be a better choice than your in-state plan, even without the state tax deduction because, over time, lower fees and better performance will grow into a larger (potentially much larger) college savings nest egg.
The bottom line: You need to do your homework. Talk with your financial advisor. A good resource is http://www.savingforcollege.com/.
Most 529 plans offer a wide range of investment choices, such as a lineup of mutual funds from which you can build your own portfolio or age-based portfolios that become more conservative as a child nears college age. For most families, the age-based option makes the most sense because it’s simple and you can “set it and forget it.”
Note that if a parent opens a 529 account for a child, the account is in the parent’s name and the parent controls the account. If your eldest child doesn’t need all the money because he or she attended a more affordable school or received lots of scholarship money, you can change the beneficiary to another child or use the account to pay for graduate school.
Key Takeaways for Parents
Remember these three points to keep your saving goals on track:
- College could be more expensive than you think, so save early and save often.
- Don’t let saving for college crowd out saving for your retirement.
- Research which 529 college saving plan is best suited to help you achieve your goals, since it may not be the plan offered by your home state.
One final tip! Ask grandparents to make contributions to your college saving accounts instead of spending money on more toys (that your kids probably don’t need).
About David McClellan
David McClellan joined Forum Financial Management, LP in August 2015. He has 25 years of professional experience, primarily in financial services. David’s practice focuses on financial planning and helping clients prepare for a secure retirement. He holds a Retirement Management Analyst (RMA) certification.
Prior to joining Forum, David served as the Director of Strategy and Execution at Albridge, a division of Pershing that provides technology solutions to broker-dealers and financial advisors. Previously, he was Vice President of Business Development for Morningstar. At Morningstar, he led a retirement income initiative and built retirement income planning software for financial advisors as well as wrote educational content on the risks investors face in retirement, which won the 2007 Excellence in Communications award from InvestmentNews.
David earned a bachelor’s degree with honors in Economics and History from the University of Texas at Austin while lettering on the swim team, which won several national championships. He received his MBA from The University of Chicago Booth School of Business with concentrations in finance, strategy and marketing.
1 “Cost to Attend the University of Texas at Austin.” CollegeCalc.org (website data updated as of August 2016), http://www.collegecalc.org/colleges/texas/the-university-of-texas-at-austin/.
2 “Cost to Attend Princeton University.” CollegeCalc.org (website data updated as of August 2016), http://www.collegecalc.org/colleges/new-jersey/princeton-university/.
3 “Tutorial - The Real Cost of Higher Education.” SavingForCollege.com (accessed as of June 14, 2017), http://www.savingforcollege.com/tutorial101/the_real_cost_of_higher_education.php.
4 Calculations assume 7% annual investment return. Forum Financial Management, June 14, 2017.
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