Saving for College
College costs are currently about $37k per year for private schools, $11k for public schools (in-state) and $27k (out-of-state). Some private universities can run as high as $75k per year. Even for those in a comfortable financial position, these numbers can be daunting. Add in that we only have 18 years to save, and it sounds even more difficult. Keep in mind though, that you don’t need all four years of tuition in year one. Saving for college may be scary but it’s doable with the right financial advice, and by exploring all options including tax advantaged accounts.
College costs can be paid by some combination of savings, loans, and scholarships.
Savings
Money can be saved in any bank or brokerage account, but there are accounts designed to offer tax advantages for college saving. I personally recommend the 529 plan. See below for information on both options.
Loans
Don’t normalize student loans! Loans should be avoided as much as possible as student loan debt is a heavy burden that can affect students for decades.
There is a massive amount of information about student loans, both government and private, that I won’t get into here. For federal loan information I recommend visiting studentaid.gov, but again, student debt should be avoided or limited as much as possible.
Scholarships
Scholarships are not an option many people consider, but there are thousands of scholarships available and all students should apply for those that align with their abilities and talents.
Tax-Advantaged College Saving Accounts
529 Plans
A 529 plan is a state-sponsored, tax-advantaged way to invest for education expenses. Every state offers a 529 plan, but the plans vary by state. You don’t have to live in a state to participate in that state's 529 plan, but some states offer tax benefits for residents that use their state’s plan.
There are no income limits, and friends and family can contribute to it as well.
Withdrawals can be used to pay for qualified educational expenses at any eligible U.S. postsecondary institution or apprenticeship program. $10,000 can also be used for K-12 tuition expenses, to repay student loans for the account beneficiary.
Lifetime contributions can total $400,000 or more (varies by state) per beneficiary.
For additional details and regulations, visit sec.gov.
Education Savings Accounts
ESAs, also known as Coverdell accounts, are another tax-advantaged education savings plan. Withdrawals can be used for qualified elementary, secondary, and postsecondary expenses. There are a few pros and cons to consider before opening an ESA.
Only couples with adjusted gross incomes of less than $220,000 are eligible to open ESAs (for individuals, that figure is $110,000).
Contributions are limited to a maximum of $2,000 per year until the beneficiary's 18th birthday.
The account must be liquidated by age 30
ESAs provide a wider range of investment options than 529s.
Unlike 529s, ESAs don't have the $10,000 tax-free withdrawal cap for qualified expenses to an elementary or secondary public, private or religious school.
Choosing Investments
Saving for a college is a long-term process, but not as long-term as retirement. For retirement, it’s worthwhile investing primarily in equity (stock) investments, while short-term saving should be much more conservative. College saving usually lies somewhere in the middle depending on when you start.
If your child is young, tilting more towards equities is a smart approach but be sure to cut that back as they approach college years. You don’t want to lose a significant portion of college savings to a market drop a year or two before college begins.
While every expert recommends a different allocation, I’ve listed a general rule of thumb in the chart to the right. To come up with a plan you’re comfortable with, contact me.