By some estimations, the price it will cost to send today’s toddler to college for four years could be upwards of half a million dollars. Granted, that’s an estimated Ivy League sticker price, but still, it is a sizable sum.
At present, the cost of public universities is estimated to be around $40,000 a year. The inflating price of college, which is growing 2.5 times faster than the standard rate of inflation, is probably one of the few things that could temper the shock at today’s preschool tuition. Given what is known about the finances of higher education, it is very important, if possible, that families start saving for a child’s college tuition early on. Some of the best tools available today are classic college savings plans, known as 529s and Coverdell plans.
An important step when considering savings vehicles is to meet with a financial planner who specializes in helping families pay for colleges. Check with the National Institute of Certified College Planners to find a financial planner near you for investment strategies that will optimize your options in paying for college.
There are many ways to save for college, but the babysitting money and birthday checks go farthest in a college fund vehicle called a 529 plan, administered by states, schools, and state agencies. 529 plans are either pre-paid tuition plans or college savings plans.
Pre-paid tuition plans are generally for state schools and community colleges, although some offer exceptions that would allow funds to be used at out-of-state universities or private colleges. Read each plan carefully to understand its portability options.
College savings plans, sometimes called investment plans, essentially establish a savings account for the future student, who is named as the beneficiary. Typically these offer greater flexibility in terms of school choice.
Both kinds of 529 plans have their upsides, and each state has different rules about how and where the monies can be used. Thirty-four states and the District of Columbia offer deductions in-state income tax for donations to a 529 plan, which is a gift to the giver. There are also increased gift tax exemptions that allow donors to give up to $14,000 annually without being subject to a gift tax. And, 529s are getting more flexible and will cover a range of costs associated with college — such as computers — since non-tuition expenses can add up.
Another college savings vehicle is a Coverdell Education Savings Account (ESA), which is an education-oriented sort of IRA (individual retirement account). It was conceived as a temporary measure but became permanent in 2012. With a Coverdell plan, families can invest up to $2,000 a year tax-free to be used for tuition at accredited schools from kindergarten through college. One drawback is that families can’t give more than $2,000 a year without facing penalties.
So, considering that monies put into 529 plans may not be taxed and will grow as an investment of, say, 7 to 20 percent annually, they are extremely beneficial ways to save money for college. All it takes is a little research, paperwork, and a regular income. The earlier you set up a 529 plan, the better your chances are to help your child afford college. One financial planner suggested $50 a month from birth per child would yield “plenty of money for college.”
Ask The Experts
It will behoove most families who are not sophisticated investors to meet with a financial planner to find ways to secure assets for college. For example, IRAs and cash-value life insurance (whole life, variable, and index) are not counted as assets for families filling out the FAFSA (Free Application for Federal Student Aid). Thus, financial aid offers are based on assets other than these.
Also, with a life insurance plan, should something happen to the family breadwinner, assets are placed in a safe haven account to help sustain the family and its future plans, which would likely include college for kids. And note well: File the FAFSA as early as you can (it is available beginning January 1 of your child’s senior year in high school), as well as other forms required for the colleges your child is considering. These may include the College Board CSS Financial Aid Profile, state forms, and private, institutional forms. Some of these shorter forms get fairly detailed, even going as far as asking families what car(s) they own. So, “if you are looking for financial aid, don’t drive a Mercedes,” advised one college financial planner.
To learn more about how financial aid works, read our article Demystifying the Financial Aid Process.
Filling the Coffers
529 plans make it easy for families to give money for college, especially in lieu of pricey gifts that are quickly outgrown. You can set up a 529 as early as possible, and, should relatives ask, certainly give them information about your child’s plan. If adult siblings are weary of the gift exchange and clutter among cousins, suggest everyone put money into 529s, particularly if college is going to cost what experts predict it will.
Your child should also be a key contributor to the college savings effort. Encourage her to put a respectable portion of all money that she earns or is given into her college savings plan. Show her how her investments accrue interest. It is never too early to emphasize that hard work and savings will lead to more options in the future. That said, it's often a good strategy to move any money your child has put away over the years into your own accounts before filing the FAFSA. The reason is that the federal government, when considering a financial aid application, considers 20 percent of your child's savings eligible for educational expenses but only 5.64 percent of yours. Again, it's smart to consult a financial planner to discuss your specific circumstances.
For families who do not have an additional $50 per child to invest in 529s or other plans, remember that every little bit helps! Also keep in mind that there are other options for making up the difference between a family's savings and the cost of college: namely, scholarships, grants, and loans. Check out Noodle’s Financial Aid for College page to learn more about these kinds of options.
One hopes that in the future, the price of college won’t keep too many from the fantastic learning and earning opportunities of higher education. The proliferation of advantageous college savings isn’t quite like the G.I. bill, but 529s and smart financial planning will safeguard higher education for the next generation of Americans.