College Savings Strategies

My colleague, Cheryl Sherrard, recently wrote a piece on what parents should consider before sending their children off to college for the first time.  A Health Care Power of Attorney (HCPOA) and Health Insurance Portability and Accountability Act (HIPAA) waiver are critical for a child that is 18 or older yet still dependent on their parent(s) for assistance.  If you are not yet at the point of sending your child off to college, but rather are at the stage of considering how you will fund higher education for your young children, there are some basics you should consider now, before time gets away from you.

Some Basics[1]:

  • Projected tuition and fees at Public In-State university is $108,100 (4 years, enrolling 2030)
  • Projected tuition and fees at Private college is $362,800 (4 years, enrolling 2030)
  • Average annual increase in cost is between 4% and 5%

These costs are substantial.  If you prepare early, the impact of these costs on your annual budget can be reduced.  The key is starting early and saving consistently.  There are many ways to save but this piece will focus on utilizing a 529 Plan.  529 Plans are widely used and offered by many states with investment options that offer plenty of ways to diversify a portfolio depending on the age of your child and your tolerance for risk.  If you live in North Carolina, a good place to start is CFNC.org.  The College Foundation of North Carolina provides parents interested in saving for college, a good source of information to begin determining the best course of action.  This, combined with the advice of a financial professional, can be a good first step in saving for college in a way that is balanced with your personal need to save for retirement.

Saving Strategies

There are multiple ways to save for college.  I tend to advocate for one that strives to have a 529 Plan cover a majority of the costs but not necessarily all of the costs.  529 Plans are effective tools but dollars saved in 529 Plans must be used for qualified higher education expenses.  Because it is hard to predict what your child may need when they reach college, it is possible to overfund a 529 Plan.  If this happens, you may be faced with penalties when withdrawing money from a 529 Plan.  To avoid this, consider opening a regular investment account in the parent(s) name to complement the 529 Plan.  This combination provides tax efficiency through possible state tax deductions in the year contributions are made to the plan, tax-sheltered growth and tax-free distributions from the 529 Plan when used for qualified higher education expenses, and greater flexibility by personally owning the investments in the regular investment account.  As an added benefit, any money left in the regular account can be used for your personal needs including retirement.

Parents can also establish a trust for the child naming them as a beneficiary to compliment a 529 Plan.  Trusts are effective at protecting assets for children and can also be structured to provide money for certain needs the child may have during their life.  Examples include healthcare, education and certain other support requirements the parent can list in the trust.  Creating a trust is more complicated and costly than opening a regular investment account.  Before opening a trust, parents should consult their financial and legal advisors to determine the right solution.

A Coverdell Education Savings Account (formerly known as the Education IRA) can be used as another savings tool but it has a few more restrictions.  Contributions are limited to $2,000 per child per year.  The low contribution limit of $2,000 means investment expenses can take a greater portion of your earnings.  Account distributions are normally tax free when used for qualified education expenses but aren’t always when combined with other financial aid options such as the Hope or Lifetime Learning credit.  Care should be taken when using these latter education resources to optimize your tax efficiency.

Saving Amounts

Every child and situation is different so you should always seek help from a financial professional to determine the ideal strategy and amounts to save.  However, below are some dollar figures to consider setting aside in a 529 Plan to cover the projected costs of the 4-year public in-state education reference earlier in this piece if you haven’t started saving.

Age of Child                             Annual Savings[2]

1 (enrolls 2030)                                 $3,500

3 (enrolls 2028)                                 $4,600

5 (enrolls 2026)                                 $5,700

7 (enrolls 2024)                                 $7,200

10(enrolls 2021)                                $10,900

 

Don’t let saving for college sneak up on you.  As many of you are figuring out, your children grow up quickly.  If you have established a regular savings plan then you’re on your way.  Be sure to get periodic check-ups to make sure you are staying on course because assumptions can change.  If you haven’t started a plan, then take a few moments to reflect on how ready you are to cover the costs of college and what steps you might need to take to get better prepared.

 

_______________________________________________________________________________

This summary should not be the sole source of information when making a decision regarding college savings. As with any financial situation, please consult a professional before making any final decisions.   

[1] Sourced from College Board Advocacy & Policy Center

[2] Assumes 6% average return. Taxes are not considered.