If you’re like me and have young children around, college probably seems eons away.
But, if you’re also like me, you have swiftly realized how fast time goes with kids and how quickly they grow up. If they are in preschool now, tomorrow they will be setting up their dorm room for college (at least that’s how it feels).
Don’t get caught unaware and unprepared for college. It’s not cheap, and it can seriously harm your finances (and your kids’ future finances) if you don’t plan ahead for college costs.
The Real Deal
Here’s the thing: college is ridiculously expensive. I know most of us dream of our kids going to a great school and getting a solid foundation for their future career, but have you considered how much of an investment it will take to get them to that point?
The numbers don’t lie (in fact, they may cause you to sweat a bit). For the 2014-15 academic year, a full-time student was looking at a bill of at least $22,750 (for a public college) and as much as $45,760 for a private institution. The costs will vary depending on room and board and other educational costs, but either way, that’s a pretty penny for one year of school.
And unfortunately, good intentions just won’t cut it. Parents might plan to take care of 66 percent of college costs for their kids, but most of them are only set up to cover 27 percent by the time they send their children off into the great big world. Stats show us that those who have a plan tend to save more. If you need some motivation to start saving, take a look at these numbers:
Let Time Work for You, Not Against You.
Time is your friend. If you start early, you’d be surprised how little you need to save. I recently worked with a client who wanted to save for college even while his wife was still pregnant with their first child.
It turns out that with the help of time and the magic of compounding, for his situation he only needed to save $325/month in a 529 College Savings Plan to pay for the projected costs of in-state tuition, fees, room & board, etc (the whole enchilada). Now, $325/month is not pocket change, but we’re talking about paying for college, which is getting more expensive each year.
The flip-side can bite you in the ass.
I’ve had conversations with acquaintances and a few prospective clients with older kids that seem a bit alarmed about the fact that they haven’t quite got around to setting aside dedicated funds for college. It seems to happen around age 10. It’s like an alarm bell goes off. “Wow. In less than 8 years Emma will be off to college!”
At that point, you have to save more money each month to hit your goal. A lot more. For someone trying to hit the same goals as my client mentioned above, but starting when their kid is 10, with college less than 8 year away, they’d have to save $650/month! That’s double what you’d have to save–every month–compared to starting earlier.
Start early. Even if it’s just a little each month. Here’s a tip from Savingforcollege.com’s founder Joe Hurley from our “12 Expert Tips on Building Wealth” blog post:
“Even when other financial goals take priority start a 529 account for your child and begin automatic contributions of $25 per month. Your account statements will be a good reminder that college is getting closer and you’ll think about increasing your contributions. ”
Your Best Bets
Just like any facet of your financial house, there are a crazy amount of options and the immense volume of research and advice can be overwhelming. But don’t let the complications prevent you from taking action. So, where do you start with your college savings? Here’s an overview of two popular choices:
529 plans are complicated enough to make your head spin. Thankfully, you have me to make sense of it all for you!
In my former job at Morningstar, I had the incredible task of leading a team of analysts in researching over eighty 529 college savings plans. We went deep with our investigation, even interviewing state representatives for these plans, to create Morningstar’s “The Best and Worst 529 College-Savings Plans,” (2015 version here) which turned out to be Morningstar’s top-read article of the year! When you can’t make sense of it yourself, let me guide you through the muddied waters.
Let’s dig in. In layman’s terms, a 529 plan is a state-sponsored education savings account that allows earnings to grow on a tax-deferred status. There are two categories of 529 plans: prepaid tuition plans and college savings plans.
Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, is a pretty sweet deal. On the other hand, college savings plans have no age or income restrictions and allow you save up to $300,000 per child in many state programs and then use it, tax-free, for qualified education expenses
A common myth I want to dispel is that you have to use the plan that is sponsored by the state where you live. In this case, loyalty isn’t always a good thing. This is why my previous research with Morningstar is essential because you can see which state plans rank the highest and choose the plan that will give you the most bang for your buck. And trust me, you’ll need a lot of bucks when it comes time for college. Here are some additional factors to consider when making your choice.
You’re probably thinking, “Isn’t my Roth supposed to be for my retirement, not my kids’ education?” You are absolutely right, but don’t discount Roth IRAs as a secondary college savings plan.
In recent years, Roth IRAs have gained popularity for things other than retirement. Why? Because they are flexible. Your Roth contributions (not your earnings) can be withdrawn at any time and can be used for any purpose. Do you need to hear more perks to convince you? Roth IRAs can help you avoid the high fees that some 529 plans charge and you also have virtually unlimited investment options in a Roth IRA (529s are restricted to a specific list of investments, similar to a 401k plan at your job).
For college savings, Roth IRAs aren’t the perfect option, but they do offer an alternative to the traditional 529 plans. Think about opening a 529 plan for college, but also continuing to contribute to a Roth for retirement. This strategy gives you extra resources to draw on if you need them.
Saving for college should rank high on your priority list if you have children of any age. There are even more options than just 529 plans and Roth IRAs, but the key takeaway here is to start planning for your child’s education costs, today.
Speaking of college, did you hear about my new “Office Hours”?
That term can either bring up pleasant memories from college, or make you cringe a bit thinking back to exams and finals. Either way, I’d like to offer my own version of Office Hours to you and pass on my knowledge (including my top 529 Plan picks among all 80+ plans out there) from all my 529 experience.
How does it work? It’s simple. Book a time on my online calendar that’s convenient for you and we can discuss how to save for college, and the best options for your situation. At the time of our appointment, you and I will have a 15-minute phone chat about how I can help and additional resources I can point you towards.
The best part? No quizzes or exams after we chat.
Pathway founder and principal Greg Brown is a tech-savvy advisor with broad financial planning and investing expertise. Greg’s financial advice has been featured in publications like the Wall Street Journal, Businessweek, and USA Today. He holds a master’s degree from the University of Chicago and a mechanical engineering degree from Michigan State University. Prior to Pathway, Greg was a lead analyst at Morningstar and previously held engineering roles at Dell.
 G. Kent et al., “The Condition of Education – Postsecondary Education – Finance and Resources – Price of Attending an Undergraduate Institution – Indicator May (2016),” The Condition of Education – Postsecondary Education – Finance and Resources – Price of Attending an Undergraduate Institution – Indicator May (2016), May 26, 2016, , accessed September 06, 2016, http://nces.ed.gov/programs/coe/indicator_cua.asp.
 “9th Annual College Savings Indicator: Executive Summary of Key Findings,” 2015, , accessed September 6, 2016, https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/CSI-Exec-Summary-NATL.pdf.