Pssssst, pop quiz: What’s in your kid’s college fund?
What? Oh, look over there at that pretty bird. La-la-la-la-la.
OK, parents. We’re going to have to talk about something you might want to avoid, something that too many of us ignore, or wish away, or think we just don’t have the resources to deal with: college cash.
Because hindsight is 20/20. Forty-four percent of experienced moms polled by NerdWallet said they wished they had been advised to start saving for their children’s college education during their children’s infancy. The projected cost of college 18 years from now is enough to make anyone spew their coffee: The average four-year tuition and fees for a private college in the year 2033 is $323,900; a public in-state university enrollee can expect to pay $94,800, according to Saving for College.
Here’s the bright side: Anytime you tackle this planning, whether during your child’s infancy or well beyond, you are getting ahead and making the future more manageable for your student and yourself.
“It’s daunting to know that helping your child choose a college is one of the biggest financial decisions you will make in your life, so do your homework as you start saving money,” says Ron Lieber, “Your Money” columnist for The New York Times and author of The Opposite of Spoiled.
While there’s no one-size-fits-all answer, the facts below will help you start saving for your child’s (or children’s!) college education. With all the stresses of parenting, it will be one less thing hanging over you.
Create a saving mindset
When you think about trimming expenses to fund future college costs, ask yourself what you value most, says Tracy Cutchlow, author of Zero to Five: 70 Essential Parenting Tips Based on Science and a former personal finance editor at MSN. “Spend your money on what feeds your soul and not on the rest. You will spend less but feel that you’re living quite well. If saving any amount feels too hard, work to reduce your essential expenses to 60 percent of your gross income. That includes taxes and committed expenses like sports or music lessons,” Cutchlow says.
Saving has to be automatic, or it just won’t happen, she adds. “Have the money deposited directly from your paycheck into a savings account, so it never hits your checking account. Then, set up the investment account to automatically withdraw the money from that savings account. You don’t see it, you don’t think about it, you don’t miss it.”
Start the process by tracking your monthly expenditures. “I suggest to parents to create a financial plan that encompasses all your short- and long-term goals to learn what it will take to realistically achieve them,” says Karalyn Carlton, president and financial adviser at Carlton & Company Financial in Seattle. “After gaining a clear understanding of your monthly expenditures, you can fund what is most important in your goal planning, including an emergency fund, retirement and educational planning.”
The GET conundrum for early savers
Right now is a curious time to talk about college savings, because our state’s pre-paid college tuition program — Guaranteed Education Tuition, or GET — stopped selling new units on July 1, 2015 for a period not to exceed two years. This temporary closure is in response to the passing of the College Affordability Program by Washington state lawmakers; the program lowered tuition at our state’s public colleges and universities. With the 529 prepaid tuition plan, people who bought units saved money by prepaying part or all of their children’s college tuition costs now. Here’s a big caveat: This model doesn’t actually work if the cost of tuition goes down instead of up.
While GET retools the program, current enrollees can roll over their money into another education savings plan through December 2016 with no financial penalties. “We’ve had a lot of people do that, but more customers are waiting and seeing what happens with the program,” says Betty Lochner, GET program director. However, a recent survey of area financial planners found that those who were asked unanimously recommended against parents utilizing the program. Stay tuned to news about the future of the program by checking the GET website which will have more to report after an April 11 meeting.
If you’ve already bought into the GET program, look at when your GET units were purchased. “If you bought units during or before the years 2009 or 2010, you’ll likely have a gain on your investment, so hanging onto your GET units probably makes sense. For anyone who purchased units starting in 2011, it makes sense to look at other options and roll over some GET units into new accounts,” says Ted White, a financial planner at Blue Canoe Financial Planning in Seattle. “GET is not dead, but investors should assume that units will gain about 2.5 percent per year (this is the average growth over the last 10 years in median hourly wages).”
Basics of saving
As long as the ages of your children are still in the single digits (9 and younger), consider opening a 529 college savings plan. “529 plans come in two flavors. Programs like the GET allow buyers to purchase discounted future tuition units, while the college savings plans allow you to invest money in mutual funds that could grow over time tax-free. This second flavor, often called traditional, is a tax-advantaged account that is very similar to a Roth IRA retirement account. My wife and I have traditional 529 plans for our 5- and 2-year-old children,” White says. You can choose any 529 plan, not just one in the state where you live — or the state where you think your child will go to college. (An aside: Right now, our state’s only 529 plan is GET, which isn’t taking new enrollees, as mentioned previously. Washington state is also planning to start a traditional 529 saving plan, which may open as early as 2017.)
People can pick an adviser-directed 529 or a direct 529 without an adviser. “Sometimes the last thing someone wants is to direct this type of decision. In those cases, a financial adviser can help people select a 529 and assist with the underlying investment allocation,” Carlton says.
If you don’t want to find a plan through a financial planner, Saving for College is another place to shop for a 529 plan. [The website] “has an encyclopedic list of rankings and details about all of the 529 plans, and there are several ‘best of’ lists and really good low-cost plans with all of the right kind of investments. You really can find everything you need there,” Lieber says.
For parents starting early with college savings plans, think about diversifying your investments, experts say. “Don’t overfund your 529 account. Figure out your financial goal for college savings, and aim to grow half to two-thirds in a 529 account. Put the rest of your money in a taxable savings or investment account,” White says.
Of course, the big question that no one can answer but you is, how much to save? While the target amount is dependent on both your family’s values (do you want to fund your child’s whole college education? Avoid debt? Encourage scholarships or work-study?) and your disposable income, a method to get the process started is to ponder the “rule of four”: Parents save 25 percent of the money needed for college; parents give 25 percent financial support while the child is in school; the student earns 25 percent; and the student then takes on 25 percent of the cost as debt. “This method helps get the process started, but only allocates a portion of the family’s financial resources to the total cost of the college education. Also, it puts half the total cost on the kid’s shoulders, which may help her decide to choose a more economical option,” says Kevin McKinley, a financial planner and author of Make Your Kid a Millionaire: 11 Easy Ways Anyone Can Secure a Child’s Financial Future.
While the idea of saving for college can be daunting, any money you do save is worthwhile. “There are very few people that regret savings,” Lieber says. “Saving gives your child more choices.”