College Savings: The Basics of Saving for College
Got kids? If so, you're probably hoping to send them to college. And you know it won't be cheap. College costs are rising faster than inflation, and have been for decades.
But that doesn't mean you can't afford a good education for your kids, even if you have a modest salary or other substantial expenses. I'm not going to pretend college isn't expensive: Full scholarships are less common in real life than they are in the movies. You'll probably have to spend a pretty penny for the privilege of attending your son or daughter's college graduation.
The value of a college education
Even with the skyrocketing costs, a college education is still a good deal. Post-college educations tend to garner graduates salaries that are 60 percent higher than those of high school graduates. Over a lifetime, college graduates typically earn $1 million more than those without college educations.
That's a big increase in lifetime wealth!
College graduates typically also have more flexibility in the careers they choose, which comes with side benefits like more job satisfaction. Not only does a college degree make you richer, it can give you a better shot at happiness, too.
Those are some strong incentives to help our kids get a great college education. But how can you pay for it? By saving slowly and steadily, of course.
Save early and often
Like any savings goal, the most important part of saving for college is simply to start doing it, and commit to it regularly. The younger your kids are when you start building their educational nest eggs, the more funds you'll have available to help them achieve their dreams.
There are plenty of tricks to get the most bang out of your college savings bucks. Not all college savings accounts are cut from the same cloth, and it's worth taking a little time to look into your options before you invest.
First, be realistic about what you can contribute. Don't try to save your child's entire college costs before her 18th birthday. Save what you can. Aim for saving one third to one half of your child's expected education costs. The rest you can pay for when your child attends school, through your current income, grants and loans, and your child's own contributions.
Of course, saving more money is always better. But saving between a third and a half of the total cost should be enough to get you through.
Put yourself first
Also be sure to bolster your own assets. Contribute as much as you can to your home equity and retirement savings.
Most experts agree that you should be fully funding your retirement and paying down your mortgage before you start saving for college. Provide for your kids by guaranteeing a solid financial future for yourself first. College students generally have ready access to low-interest loans. This isn't true for retirees. If you don't want to become a financial burden to your grown kids after you retire, you'll attend to your own future before saving for theirs. Trent at the Simple Dollar does a great job of breaking down the reasons for valuing retirement savings over college savings.
This strategy isn't just good financial sense for you. Home equity and retirement funds are special classes of protected savings. Most schools don't include these assets at all in their financial aid calculations. A few elite private schools do, but they won't expect you to dip into them as heavily as your cash savings accounts.
The 411 on 529s
Speaking of savings accounts, when you're ready to start a college fund, you'll want to choose one carefully. Keep the savings in your own name. Parental assets are weighted less heavily than student assets by financial aid offices. That means your savings impact the aid your child qualifies for less than the same savings in your child's name.
A state-run 529 plan is a good bet. These tax-sheltered funds allow deposits to grow tax-free, and all withdrawals spent on educational expenses are tax-free as well. A word of warning: If you withdraw the money for something else, you'll pay a hefty fee, akin to an early withdrawal from a retirement account.
Not all 529 plans are the same. Administrative costs for these plans range from 0.2% to over 2%. That's a huge range; you'll want to choose carefully. Additionally, some plans adjust their mix of investments as your child ages, from growth-oriented ones to more conservative ones that protect your nest egg.
Every state offers a 529 plan, but you're not limited to the one your state runs. Nearly all states allow out-of-state investors. Your state may offer special incentives like matching grants or discounts at state schools, but given the range of expenses and options in these plans, it's worth your while to look around
If you're counting on financial aid grants and subsidized loans to make up a critical part of paying for college, you'll want to maximize your financial aid qualifications. That means putting money into your mortgage, paying off debt, fully funding your retirement, and then saving for college.
Conveniently, these are all good strategies for general personal finance. With the exception of the restrictions on a 529 plan, they'll stand you in good stead whether your kid gets into Harvard or decides to go find himself on a walkabout in the Australian outback.
If beyond those basics, you can save a substantial nest egg for your son or daughter's education, you'll be in great shape when the time comes. A financial advisor can help you determine, based on your child's age and your income, whether the tax-sheltered aspect of a 529 plan makes it worth the restrictions and risks.
Don't let the intricacies of college savings be a deterrent to getting started. You child's education will be a major life expense for your family. The sooner you begin preparing for it, the better of you and your kids will be.