5 Steps for Parents Saving for College

More and more parents say they hope to foot the bill to send their children to college, but many of these same people aren’t taking the necessary steps to make it possible. 

Interest in saving for college education is growing for three interrelated reasons. 

First, roughly 90 percent of parents believe that college is a good investment in their children’s future. A four-year degree is increasingly seen as a requirement for reasonably well-paying and stable jobs. The independent data from the marketplace confirms that this belief is correct.

Second, higher education costs are steep and rising. Tuition costs alone can be more than $21,000 a year at a four-year public college, a more than 144 percent increase from the $8,604 at a four-year public college for the 1985-1986 school year. Tuition costs at a private college can be more than $48,000 annually, a 128 percent climb from the average $20,578 in the mid-1980s. While the increases have moderated slightly in recent years, the amounts for the coming decades can’t be predicted with certainty. It is reasonable to assume that tuition increases are unlikely to show any sign of stopping.

Third, the amount of student loan debt taken on to finance college education is also on the rise, to levels much higher than parents or grandparents themselves experienced when they were student-age. Currently, the total amount of student loan debt stands at $1.56 trillion. About 44.7 million Americans have student loan debt. The average amount is a somewhat eye-popping number: $32,731. 

Debt service on a loan of this size can sap a young person’s disposable income, making saving for traditional adult benchmarks, such as the purchase of a first home or starting a family, more difficult to obtain. Parents increasingly see college savings as a way of counteracting or minimizing the disadvantages associated with large amounts of student loan debt.

So, what represents the best strategy to save for your children’s college education? We’ve broken it down into 5 steps. 

 

College tuition can be expensive. Contact Linscomb & Williams to see how we can help you plan for the future.

 

1. Establish a Realistic Plan

Saving for your children’s college education shouldn’t be a hit-or-miss proposition. Many financial advisors recommend that it be an integral part of a comprehensive financial plan, along with cash flow management, retirement savings, investments and an estate plan. If your present financial advisor has not made this topic front and center, it’s time to initiate a conversation.

At the same time, it’s important to not let college savings take the place of retirement or other savings that are equally necessary. It’s important to set up a plan that will let you save sufficiently for all future financial needs over time.

2. Utilize the Benefits of a 529 Plan

A 529 plan is a tax-advantaged plan to be used for education savings. There are two types. 

One is an educational savings plan. Withdrawals from it can be used for the beneficiary’s (the student’s) tuition, mandatory fees and room and board when the time comes. These plans typically offer a wide variety of vehicles to invest in, such as stock mutual funds and bank accounts.

The second is a prepaid tuition plan. Under this type of 529 plan, an account holder can buy units/credits of tuition and fees at current prices. These can be used for the beneficiary in the future, when presumably the cost of tuition and fees will be higher. These are designed to let account holders avoid the rising costs of tuition and fees, and are generally for use at public, in-state institutions.

All states offer 529 plans, but the terms and types offered can vary, so it’s important to know what’s available in your state. Many areas, for example, have a residency requirement for prepaid tuition plans at a state university. Others can be used at any institution. Some allow a beneficiary to change, so that if one child decides not to go to college, or not to go to a particular school, the plan can be used for another child. 

The tax advantages also vary by state and type of plan. The tax advantages can include being able to deduct yearly contributions from your state (not federal) taxes, contributions growing tax-free over time and not having to pay federal or state income taxes on qualified withdrawals. It’s prudent to discuss the potential tax advantages offered by a particular plan with a financial planner in your area. If you’re looking for a financial planner in Houston, TX, contact Linscomb & Williams to see how we can help.

You should also be aware that the amount of money in a 529 plan can affect a student’s eventual eligibility for financial aid, so structuring accounts and planning withdrawals with this in mind is important. 

3. Start Saving as Soon as Possible

Because 529 educational savings plans and other investments made for education can grow over time, it’s important to start saving as soon as possible. 

The current average beneficiary’s age for 529 accounts in the U.S. is 5 to 6 years old, compared to roughly 11 years old a few years ago. That shows some great progress in how families are trying to address this need. Why? Because even five or six years of additional compound growth can make a considerable difference in the final amount. In this regard, saving for a 529 plan is very similar to saving for a retirement plan: The earlier one starts, the more the investment can accrue money over time.

4. Use Windfalls to Augment Savings

There are many possible methods for funding college savings. One of the most popular is to use any windfalls, such as annual bonuses from work, tax refunds or inheritances, and place them in a 529 or other savings vehicle. 

This money falls outside the common parameters of your income – that’s why they’re termed “windfalls” – but even a bonus or tax refund of several thousand dollars can compound nicely over time.

5. Ask for Contributions in Lieu of Gifts

Another tried-and-true method of funding college savings is asking family members, such as grandparents, for help. Does a family member or close friend always buy your child gifts – the latest game or toy – for birthdays or holidays? If so, they may be willing to chip in with money for a 529 or other educational savings plan instead of a physical gift. 

People understand the rising costs of college tuition and other educational expenses, plus the rise in student loan debt, so your request can be put in this context. Many family members are happy to help invest in your child’s future in this way.

Saving for college can raise complex issues of planning and taxation, so it’s a good idea to consult a financial planner in your area. Imagine the peace of mind that can come from laying out a well-crafted plan to ensure the future success of those you care about most. 

 

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Phillip Hamman, CFA, CFP®

Phillip Hamman, CFA, CFP®

Phillip Hamman is Linscomb & Williams' Managing Director, President and Chairman of Wealth Management Committee.

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