There are a few sure signs that fall is just around the corner. The days are getting noticeably shorter, a few of the earliest leaves are starting to turn color (at least here in NE Iowa), and the clearest sign of all are the Target ads featuring school and college supplies for weeks on end. There may be a few more trips to the pool to enjoy, but the cooler days of fall are just around the corner.
According to the National Center for Education Statistics, a data arm of the U.S. Dept. of Education, about 20 million families are about to be handed a college tuition bill. 60% of those students will attend full-time and nearly 14 million of those students are enrolled in four-year institutions where the average cost of attendance is $21,950 per year (in-state public university). Nanette Kamien, CFP® and author of Crazy College Money, asserts that there will be a portion of those students (and their parents) who have no plan for how to pay for it. In what I perceive as a motherly tone, she declares “That’s crazy!”
There is another thing that is crazy: the cost of college. College has become big business as parents have leveraged their own and their child’s financial futures for the (sometimes unfulfilled) promises of a college degree. I don’t have a crystal ball and can’t predict what is going to happen in the landscape of post-secondary education, but even those with only a basic understanding of supply and demand can see that college costs will continue to increase as long as students find a way to pay. I have my owner personal thoughts about the luxury accommodations that are now found on college campuses across the country, but that’s a conversation best endured over a strong cup of coffee.
With parents feeling the pinch of everyday household expenses, saving for retirement and possibly still paying back their own student loans, college savings can easily get put on the back burner. Here’s a few tips for getting started on saving for your child’s education.
1) Use a 529 Plan: Generally, it’s best to use the plan offered by your state, but if there is no state tax deduction for contributions then it’s best to shop around. Most plans offer an age-based investment option that makes the process as easy as 1-2-3. Even small monthly contributions ease the anxiety of not having a plan in place. 529 plans are honest-to-goodness simple to manage on a DIY basis. If you don’t know where to start, then seek advice on an hourly basis (rather than commission). If you have several children, I suggest funding the oldest child’s account most heavily as cash flow generally loosens up by the time the youngest attends and funds can be transferred to a younger child.
2) Use a dependent care account: Parents who use a dependent care account for child care expenses are allowed to set aside up to $5,000 per year tax-free. Unless the reimbursements from this account are absolutely essential, it’s an easy strategy to move those funds into a 529 plan after receipt. Using this strategy for the first five years of a child’s life to fund a 529 plan that grows at an average annual rate of 7% results in over $28,000 by the time kindergarten starts. Even if another dollar is never added to the plan, the account becomes worth nearly $53,000 over the next 13 years if the 7% growth rate remains.
3) Get a handle on the numbers: The World’s Simplest College Cost Calculator is an easy way to get to know the facts. It gives a quick estimate to at least get in the ballpark of reality.
4) Don’t worry about funding 100% of college: For most families it’s not only unrealistic, but also unnecessary to try to save for 100% of the cost of college. Many families that I have encountered have targeted the 50-75% funding range with the intention of leaving the last 25-50% to fund through regular cash flow or for the student to manage.
Children of parents who have done their homework about the costs of college will be blessed in two ways: one by having funds set aside and another by clearly knowing what colleges are within the scope of affordable.