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Observations On College Savings

My oldest baby boy turned 8 this week.  So hard for me to believe!  Double it and I have a teenage driver closing in on a college decision. 

Speaking of college decision, we have an Indiana CollegeChoice 529 plan in place for him.  He is reaching an age where an automatic adjustment is happening within the account.  We have benefited from the Indiana state income tax credit currently available for the last 8 years – 20% of the contributions (up to $5,000 annually) made by the taxpayer.  As we round out this birthday, we are reviewing if we are on track for the college savings goal we set.

As I look at college savings for our family, I thought I would share observations I have made planning for college for our family and helping others do the same:

1.)    Make sure you know that you are in a financial place to save for college.  Saving for college is likely not a good idea if you have high-interest debts, do not have an emergency fund, and are not taking steps to save for your retirement.   

2.)    If married, communication that is purposeful between spouses is important in this area.  Often, spouses had different experiences surrounding college which influence their thoughts on what they want to do for their children.  Some may have worked their way through, some may have had the entire education/experience paid for, some may have deemed it unnecessary, and many scenarios in between.  It is helpful in saving for college to agree on your college saving philosophy for your children and define your goal.  For example, we want to save for college is a broad goal.  We agree we want to save to cover the cost of tuition only for four years at an in-state accredited institution assuming 5% inflation and a 6% rate of return for each of my children – much more powerful and able to be calculated and tracked. 

3.)    Time matters.  I know this is a basic concept but one that still seems to get lost.  Starting at birth makes funding a savings goal more attainable than starting at 8.  And I have felt how fast these last 8 years have gone – I know it is easy for time to slip away. 

4.)    Know the options that exist for saving for college.  A 529 is widely used, but it is not the only way.  There are also financial aid considerations to be made.  Explore the options and/or talk with a financial planner to understand how to optimize your college savings strategy. 

5.)    If you get to college years and there is a shortfall in what you have been able to save, take a deep breath.  This is not a reflection on your desire to provide a college education for your children.  And you can make some impactful decisions at this crossroad that impact your future in a detrimental way.  You may support your children through college but risk becoming a burden to them in later years.

6.)    You may save for college, and college may not need to be funded.  Your children may go to work immediately after high school, scholarships may be received, the landscape of what college looks like may change, grandparents may decide to gift, etc.  Know what this means for the mechanism you use to save. 

7.)    As your children near college, talk with them about affordability of a college education.  Help them work through what a starting salary may be with their degree and what a budget may look like one year, two years, three years out.  Help them see the impact of debt to pay for college on that budget.  Help them see their prospects for growth on a chosen path, and perhaps emphasize transferrable skills or a “side hustle” if pursuing a passion that makes paying bills tougher.  If a good discussion between you and your children on this topic seems challenging, get someone else involved your children will respect and listen to.

 

Ideally, college savings is done within the context of a larger financial plan.  Here are two rules of thumb if you become overwhelmed but you want to get started saving for college:

1.)    If your state offers a tax benefit for contributions to section 529 plans, maximize your state's tax benefit if you are able. 

2.)    Use the one-third rule.  This rule states that you should expect to save one third of expected college costs, pay one third from current income/financial aid, and borrow the last one third using a combination of parent and student loans. 

As with all savings, the more you can automate to create discipline, the better.  Stay abreast of college trends, inflation, and review the amount saved versus your goal at least annually.  

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