Saving for College, Among Others

If you’ve been reading this blog, you’ll know that I called it the “Yellow Pad Plan” because I believe in using a simple, five-step financial plan as a road map for your finances.  Feel free to review the basic plan structure from my earlier blog here: http://www.affinityassetmanagement.com/content/so-what-financial-plan-anyway.  You’ll notice that item number 3 on the list is “other”.  The category of other is designed for all of those things that require you to save money but aren’t what I would consider the “must do” things – rather they fall under the “I would like to do things”.  Just a few of the more common ones:

College for the kids/grandkids

Cabin on the Lake

Early Retirement

Vacation of a Lifetime

Legacy/Endowment

 

In this and a couple of future posts I’d like to discuss some of these.  Let’s start with college for your children or grandchildren.  First, let’s talk about how much college costs.  According to College Board (https://trends.collegeboard.org/sites/default/files/2016-trends-college-pricing-web_1.pdf), 2016 published fees for tuition, fees, and room and board at state colleges average $20,090 and $45,370 for private colleges.  These are the published prices, not necessarily what you’ll pay if your child gets scholarships or financial aid, but my youngest child is a senior at a private college and I can tell you these numbers aren’t too far off what I’ve experienced. 

 

How on earth are you supposed to save enough to pay between $80,000 and $180,000 in future dollars and still save for a home, retirement, etc. all while paying your bills?  The answer: maybe you don’t have to save it all.  Start with the premise that saving some is better than not saving any.  Second, make it a group effort if you can.  Combine Mom and Dad’s saving efforts with Grandma and Grandpa, aunt and uncle, and anyone else interested in helping out (the original crowd funding!)   Third, consider saving in a tax advantaged way such as a 529 college savings account*.  The 529 lets you save in a tax-deferred account and, as long as the funds are used for “qualified education expenses” – room and board, tuition, fees, books, etc. – the funds and all the earnings come out tax free.  Some states also let you take a tax deduction for contributions make into the plan.

 

Commit to a modest amount per month and add what you can when you get what I call “windfall money” – things like tax refunds, bonuses, inheritances, etc.   Make a goal to save some portion of college expense.  Start with half.  If you are successful in saving half of the cost of college, consider that the child should perhaps be on the hook for some of the expense.  Consider also that if your child during their high school years was a competitive athlete, musician, dancer, scholar, etc. you probably have been shelling out the equivalent of 1/8 to 1/4th of a year’s tuition in the form of equipment, costumes, overnight stays en route to competitions, meals to and from “away games”, etc.  (Seriously, try adding up what you spend in driving kids around to events.  You’ll be surprised!)  So this amount is already in your budget when your child leaves for school and could be applied toward their college expenses.

 

There are a number of other factors to consider when saving for college, including the financial aid process, the Free Application for Federal Student Aid (FAFSA), which college to consider, whether to start at a community college, and many others.  We’ll try to address some of those in future posts.  In the meantime, here are some useful sources for more information:

 

www.collegeboard.org

www.savingforcollege.com

https://studentaid.ed.gov

www.finaid.org

 

As always, feel free to email me if there is anything I can do to help or with suggestions for future blog posts.  You can reach me at gedwards@cfnmail.com

 

*The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.