Planning for College

Planning for your kids to go to college has always been tricky. In order to save enough to pay for college without relying on current earnings or going too far into debt means starting early, maybe even when your child is born. But at the same time, what kind of education will your child want or need? What if your child decides that they would rather get a vocational degree, or better yet, what if your child invents the next big thing while in high school and never needs a college degree? 

The reality is, we don’t know what will happen for our children, but we can be prepared. Most of the time, if we want to encourage our children to get an in-state college bachelor’s degree, then we can encourage our kids toward that and adjust if something changes. My parents wanted my brothers and me to get a bachelor's degree from an in-state college. I wanted a private education, but I was told my parents would pay for the equivalent of a public school. I wasn’t able to make up the difference with scholarships and ended up at an in-state school, but instead of stopping at a bachelor’s, I went straight through for a Master’s. That was the trade-off I made (of course, I had to pay for the Master’s degree through savings and working as a Graduate Assistant).

Where to Start

First, make sure you and your spouse have a clear picture of what you’d like for your child(ren). This is usually based on your experience. So think about your college experience or experiences of others close to you. If you put yourself through school and had a good experience, you’re more likely to want that for your children.

Personally, my parents paid for my undergrad (though I earned scholarships, worked for extra money and helped pay for books and room / board after a few years). While I graduated with honors in four years, I was around a LOT of people that wasted time and money at school. One guy on my hockey team had less than a 1.0 after his first semester.

My wife and her siblings all made it through undergrad in four years, and while that certainly had something to do with their upbringing, I also like to credit the way my in-laws approached paying for school. They required their children to pay 50% of their college costs for a public in-state university. And not only 50%, but the first semester each year. So if one of the kids wanted to waste money by not going to class, it was their money that went to waste.

So what do you picture for your kids? Do you want to help pay for 50% of a public university? Do you want them to live away from home and get a sense of freedom? Do you want them to start at a community college, then transfer with most of their core work already done? Do you want them to have an ivy league experience even if they don’t have the grades and test scores to get there on their own? Once you have a clear picture in mind, move on to the next step.

Math It Out

Once you have an idea of what college will look for your kids, go to collegeboard.org and look a few universities that fit your picture. You may want to sit down first. After seeing what sending your kids to the experience you’d like to provide would cost this year, inflate that number to when your kids will actually be going to school. Then take a deep breath.

College cost inflation has been hovering near 6% annually for a while now, but you can search for data to decide what rate you want to use. Then remember that most students need at least four years to get through an undergraduate degree, so inflate the number three more times and add those four years of costs together. Too rich for your blood? At this point you may want to change your assumptions or revisit your picture for what you want to provide for your kids. After that, take a look at how to get to your goals.

Assuming that you’re saving money into an account where you can invest the money (we’ll talk more about that in a minute), you have to guess at what kind of returns you can expect. It’s best to be conservative with this assumption, since if you expect a high return and actually experience a low return you have to reduce your goal when you get there. If you end up with a higher return than you expected, you get to increase your goal instead. Use a time value of money calculator to calculate the savings you’ll need. (Here's one created by Vanguard specifically for College Savings) This will be the total amount you found earlier at the start of your child’s college (this will be a little off since you don’t need all of it up front, but at that point it doesn’t have much longer to grow). Now you have a monthly savings target.

What if the target is too high?

First, recognize that having some savings is better than nothing. If you would like to cover $100,000 for college and are able to save $10,000 then you may have to make some changes or find other funding sources, but you only have to make $90,000 of changes instead of $100,000. So making any kind of progress is good.

Now that you’ve decided not to let the possibility of failure paralyze you into inaction you can do one of two things if your target savings is too high. You can reduce your savings goa by finding ways to save on your picture of a college education (two years of community college, not living in the dorms, or having the student share some of the costs). 

Or you can start finding ways to boost your savings along the way. You can start with lower savings and increase them to above the original savings target to make up for lost savings. Some ways to boost savings will be to review your budget closely for leaks and find things you are willing to give up. Each time you would spend money on these things, put that money aside for college instead. (e.g., if you’re giving up weekly drinks with your significant other that usually costs $50, then put $50 each week into your college savings). You could also ask the child to help earn money that will go into the college savings fund, ask for help from the child’s grandparents or godparents, sell off old toys, etc….

But where do I save?

There are a few different ways to save for college. A 529 plan usually offers some of the best options if you have time to let money grow. The money goes in after-tax and grows tax-deferred. When you spend money out of the account, as long as it is for eligible expenses, the growth can be taken out tax-free. This makes the growth in the account slightly more powerful than the growth in a brokerage account would be. 529s are also flexible because if you need to you can change the beneficiary to another family member without taking a tax hit (with some limits). So if your first child doesn’t go to school, that money can transfer to your second. If the money still isn’t used up when they’re out of school, you can start taking classes at your local community college to use up the rest of the money (make sure to update the beneficiary first). Look at https://www.savingforcollege.com/ to see which 529 you should sign up for (I personally like Utah’s and Nevada’s).

Coverdells are less popular than they used to be, but still a decent option if you’re already maxing a 529 or if you only need to put aside a little to meet your goals. 529s allow you to put up to $15,000 in during 2019 (with an option to go higher if you use a 5 year election), Coverdells limit that amount to $2,000 deposits each year.

Brokerage accounts are the most flexible way to go. If you’re on the fence about your child going to college or whether or not you can afford to help out much, your savings should probably go into a brokerage account. There are no limits or anything to worry about here. The interest, dividends, and capital gains are taxed each year, but this money can be used for ANYTHING. If it turns out that you decide to start a business, you have money set aside for that. If you want to retire early, you can use money from your brokerage account. If your child wants to go to one of those few institutions for higher learning that aren’t eligible for 529 money, guess what, you can still use your brokerage account to pay for that.

Get Started Today!

Don’t overthink it. You can always make changes as you go. It’s more important to get started today.

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