Saving For Your Kids' College Education

  If you have kids, you love them. You want to give them everything, yet you want to make sure that they don’t have “too much” and that they “earn their way” as we once did. There is a balance when it comes to sending our children to school. However, the majority of parents want to be able to help pay for their children’s college tuition in some way, so let’s make it simple to save for college.

How Much It’s Going to Cost

Average cost of public in-state tuition in 2014: $22K. Inflated at the average inflation rate of education over the last 10 years this becomes $46K by the time your newborn goes to UGA. Four years later, you have spent over $180K in college costs (if you are considering covering the full boat). If you have nothing saved today and you can earn 7% on your money (which you should be able to do this in the stock market), you have to save $418/month to amass the full $180K by the time little Joey enrolls. Have a second child and…..well, you do the math. Calculate how much you might need to be saving using our Education Goal tool at www.yourwela.com

This can obviously be a low or high number depending on the college that you end up sending you child to, but it’s worth discussing these numbers as an average when you are planning.

How to Save

Always remember, there are student loans for a reason. People will lend kids money to go to school because they know that they have 40 years of earnings potential ahead of them to get paid back, whereas nobody will lend you money to retire. Save for your retirement first. Talk to your financial advisor or Wela to determine how much you need to be saving for you first.

Once you take care of retirement, determine how much you have in excess monthly cash flow (income minus normal expenses minus retirement savings equals excess cash flow) and set up an automatic withdrawal from your checking account into the college savings account of your choice (see below). Choose a monthly savings number using our tool at www.yourwela.com. This makes it automatic and seamless every month.

Where to Save for College

The most common place to save that we all hear about is a 529 plan. We like 529 plans because you put in cash today, it grows over time, and you can withdraw the amount you put in and the growth tax-free. This is a big benefit, especially when you start early. The biggest problem with a 529 plan is if you don’t use for qualified college expenses, you must pay taxes and an additional 10% penalty on the earnings of the account. This is a hefty penalty. You do have options, such as transferring the proceeds to anyone, family or not, but this should be avoided at all costs.

The other option is to save in your own after-tax, brokerage account and just earmark the funds for this very specific purpose. This way, if your kids are the geniuses you thought they were and get a large amount of scholarships, you won’t have to pay penalties or too many taxes on the savings you put away which they might not need.

How Much to Really Save

We don’t typically suggest saving every dollar that it could cost you to send your children to college. Many factors could reduce the amount owed (scholarships, grandparents, less than average inflation, etc.). With that in mind, we don’t suggest over funding since you are penalized for not using the funds for college.

My goal is to save 80% of the inflated cost for our family’s first child and 50% for the next one in a 529 plan. This way, the first child’s education can be fully funded, and any amount leftover can be passed onto the second child. In addition to these funds, we will be saving with “earmarked” savings in our other investment accounts.

Summary

Start saving early Know how much you are aiming to save Break down how much you need to save by month Determine whether a 529 or brokerage account makes more sense Do it, now