College Planning: Saving for College

Affiance Financial |

Many people hope to help their children earn a college degree by providing a solid family support system, along with some financial assistance. And it would be nice if, once they’ve completed this milestone achievement, they were able to start their lives without the burden of student-loan payments. But graduating debt-free, or even nearly debt-free, from an institute for higher education is becoming more difficult than ever.  

Deepening Debt

Thanks to a variety of economic factors, an unfortunate reality for many of today’s college students is the need to take out loans to pay for higher education. As the Huffington Post recently reported, contributing to the spike in student loans is the fact that “…while average student debt at graduation has skyrocketed by 200 percent since 1993, income growth has stagnated.”[1] This debt has been compounded by rising tuition rates at four-year institutions, which on average went up 14 percent between 2008-2009 and 2013-2014. This is more than a nine percent increase over the previous five years.[2]

So, how can you help your child avoid graduating with an unmanageable load of debt? We asked Affiance Financial ’s Steve Lear, ChFC, CLU, and Andy Fishman, CFP®, for their best advice,

Steve and Andy are acutely aware of the rising costs of higher education. Together, the two business partners have raised a total of 11 children—nine of whom they’ve helped attend college thus far. In fact, they’ve each spent the last 30 years saving for college.

The Fishman Family

Andy has empathy for the challenges many families face when trying to afford post-secondary education. He currently has two children attending college, one in his sophomore year and the other a senior. He also has 14-year-old twins, who, he jokes, “don’t get to go to college!”

Andy’s strategy has not changed much over the years. It currently includes saving for the twins’ future expenses while paying for his two older children’s current college costs. He admits his strategy may not be right for everyone, but offers this universal piece of advice to families: “Start saving for college as soon as possible, even if it’s only $50 per month.”

The Fishman family started saving for their children’s college educations by creating what Andy calls different “pots” of money. They utilized a variety of options, including a Coverdell Education Savings Account (previously known as an educational IRA), a 529 plan, and a Uniform Transfers to Minors Act (UTMA) account. The Fishmans also maintained a joint account containing funds earmarked for college funding. Andy notes that the diversity in the family’s savings vehicles was a two-pronged tactic. “We had a combination of everything, partly in order to get tax benefits, but also to have some flexibility with the dollars if, for some reason, college wasn’t the right track for one or more of the kids,” he says.

Andy encourages families to diligently research every option when looking for funds for their children’s educations. Sources to explore include scholarships and grants, but he warns parents not to rely on them. “Explore all the options and be proactive,” he says.

Of course, Andy suggests discussing college funding with your financial advisor, who can help you put an affordable and effective “savings plan of action” in place.

The Lear Family

In late 2013, Steve accompanied Rebekah, the youngest of his seven children (who range in age from 19 to 32), to college. When asked about his family’s experience ushering a gaggle of children into college, he responded that they took an individualized approach to their college-savings plan. In other words, they saved as much as was comfortable for the family, then allocated the money based on each child’s needs.

When his first child headed off to college, Steve offered options for funding based on what his daughter wanted from her education. “We have ‘x’ amount of dollars set aside,” he told her, “so here are your choices:

  1. You can go to the most expensive school and have three years fully funded.
  2. You can go to a mid-priced school and have all four years funded.
  3. Or you can go to a cheap school and have a bunch of money left over.”

“You have to get the child to focus on what they want to do with their education,” Steve says. “If they’re not ready for a great education—don’t spend the money. Wait until your kid is ready before you make the investment.”

He advises parents to support their child’s need to experiment during the first year of college and then reevaluate their plans at the end of that year. At that point, both parent and child will have a better idea of what to expect in terms of direction and funding needs. For example, some children may want to pursue time-intensive studies, such as medicine, while others might only require a few years to finish more generalized degrees.

The Lear family followed the same approach for each of their seven children: simply saving as much as they could and dividing the dollars equitably. For his clients, Steve stresses the importance of starting to set aside money as soon as you can.

The Consensus

Andy and Steve both agree on the following suggestions to help your child afford his or her college education:

  1. Use a variety of savings vehicles, including Coverdell ESAs, UTMA accounts, and 529 plans.*
  2. That said, don’t put too much money into a 529 plan, because the funds can only be used for certain college-specific needs. You will have a problem if there are more funds in your 529 plan than there are eligible expenses.
  3. Encourage your children to apply to any school they’re interested in. Private schools usually have more money to give back to students in the form of financial assistance, while public institutions offer lower tuition. Just wait for the packet, which will detail what the school has to offer, before making your final decision.
  4. Consult with your financial advisor.
  5. Above all, save early and often.

*Consult your tax advisor when considering participating in both Coverdell ESAs and 529 Plans.  There may be tax consequences when withdrawals exceed qualified expenses.

Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing.  This information is found in the issuer's official statement and should be read carefully before investing.  Investors should also consider whether the investor's or beneficiary's home state offers any state tax or other benefits available only from that state's 529 Plan.  Any state-based benefit should be one of many appropriately weighted factors in making an investment decision.  The investor should consult their financial or tax advisor before investing in any state's 529 Plan.

 

References:

 [1] “Student Loan Debt Will Exceed Median Annual Income for College Grads by 2023; Analysis.” Fairchild, C. July, 10, 2013.

[2] “Trends in Higher Education Organization.” College Board Advocacy & Policy Center, 2014.