If you are a parent, you are used to paying for daycare, soccer lessons, and upgraded sneakers. All that spending may keep you from peering into the future to consider college costs, but it’s worth spending a few minutes to talk about whether to start — or forgo — an education savings plan. Let’s look at a few options.
Regular savings plan. College is expensive and this calculator gives a hint of what to expect and how to save. For example, depositing $250 per month into a savings account for eighteen years may pay for half of the cost of state tuition, calculated at $22,000 a year over four years. If you have your sights set on a private college education for Junior, you will want to adjust upward. Just remember the Golden Rule — many financial advisors will encourage you to plan for your own golden years instead of paying for your child’s college with loans. The reason is simple: your kid can get loans to pay for college, but lenders are less likely to view you as a good financial risk if you end up seeking post-retirement loans.
Talented kid, but limited financial means. A family of limited means with a talented child may do well to chuck the college savings plan and instead pay for lessons to hone skills. Your child’s stand-out talent may help with college acceptances and scholarships, but to have the best shot, you will also want to find group or online tutoring for the SAT and essays. Colleges may offer financial aid in the form of loans, but hard work and persistence could pay off for those with talent and a well-told story about overcoming great odds.
Limited talent, limited means. For kids with limited talent and means, community college and regional state schools get students on the first rung of success. But these schools often lack pushy “private school” counselors and there is a risk that your child might dally or drop out. If your child heads to a starter college, consider hiring a tutor to provide consistent nudging. Some parents find an hour of tutoring each week – either in person or via Skype – to be extremely valuable. If you need help finding a tutor, WyzAnt does a good job vetting instructors and there are other websites that can help.
Unknown talent, some means. Let’s put aside the talent quotient and look at families with a few dollars to put aside each month. This might be you – a parent who has looked at a 529 plan and wants to lock in some cash. Most 529 plans allow you to purchase units at a rate set today and then use the units years later, or you can purchase a pre-paid contract to pay for up-to-five years of college. For some folks, there are 529 tax advantages as the investment grows tax-deferred and may be distributed for college costs tax-free.
There are major caveats: 529 plans are an investment and if you get in at the wrong time, you could lose money. Plus, there are fees to consider and not all schools work with the plans. Start by making sure your preferred school allows you to use the plan and check the fees, which may include underlying fund fees, program management fees, state administration fees, broker fees.
Check Morningstar’s ratings here to see if your preferred plan is Silver, Bronze, Neutral or Negative. There are kids who enjoyed debt-free college because the 529 plan was a good investment, and then there are kids now in college who found that payments were made at the wrong time and offered no advantage. Like any investment, the plans can be good or bad. If you go with a plan, make sure your will transfers any 529 assets properly. If you have questions, check with your trusts and estates attorney.
Military service. Don’t forget that the military can be a solid career opportunity and provide money for college down the road. If your child is interested, go with them to the recruiting office to make sure they understand how the college benefits work.
Absent parent. If your child has an absent parent, you may have questions about who is responsible for college costs. You will want to check with a divorce attorney to find out your rights (vary by state), but be prepared to navigate an uphill battle unless you already have an agreement that expressly provides for expenses. A good attorney will explain to the absent parent the benefits of paying for college, including a greater likelihood of success for the child.
Scholarships. The days when only a handful of in-the-know students applied for scholarships is long gone. Nowadays everyone has access to databases matching applicants to scholarship opportunities. To stand out, your child will need a “wow” story that shows their potential to make the world better if they receive a scholarship. Stay away from worn-out stories about going to an impoverished country for a week of mission work. Instead, your child should display unexpected resourcefulness, such as building a robot to clean the cat box.
The best thing college can teach your child is maturity and you can impart that lesson early on with a frank discussion about the cost of college and family resources available. Your talk may even inspire your kids to add to their own college funds and forgo that upgraded pair of sneakers.