By: Vanessa McElwrath, CFP®, CPA, Wealth Management Advisor
It’s that time of year again- the days are getting slightly shorter, our remaining 100-degree days are numbered, and the increased traffic congestion in Austin has signaled that it is “back to school” time. Indeed, many of my friends, colleagues, and clients are preoccupied with school supplies, meet the teacher nights, and first day of school outfits. And even though my own son is only 6 months old, I still get a little emotional just thinking about how he will be starting school in just a few short years. But before you (or I) get carried away with the excitement in the air, now is actually a great time to do some homework and give some careful thought and consideration to a college savings plan. College savings becomes much more manageable when you create a roadmap and plan ahead so I wanted to share a few tips to get you started:
- Parents should plan to start saving early and often. Starting early means having to save less in the long run because savings will grow from earnings- the magic of compounding! It’s also never too early to engage grandparents to help. For instance, instead of buying mountains of toys for birthdays and holidays that our kids are just going to get bored with and outgrow, wouldn’t it be great if they considered a contribution to the college fund instead?
- Open a 529 College Savings Account. There are a lot of savings vehicles out there, but the most popular is the 529 College Savings Plan. These plans are typically sponsored by individual states and provide significant tax benefits and flexibility. For instance, you gift money to these plans and as long as your child uses the money for “qualified education purposes,” the earnings are tax free. And regardless of which plan you invest in, your child can use that money to attend college anywhere in the country. Also, the funds are not “use it or lose it.” If there is money is left over, you can transfer between family members.
- Engage your children in the planning. Don’t leave your kids in the dark on the details of their college accounts. When they are young, you can get in the habit of reading the monthly statements together and help them track the growth in the account balance over time. When they get a bit older and mature, it’s actually very helpful to have honest conversations with your children. Set expectations on how much college you are willing to fund and if they will need to contribute- either by working to cover some expenses, taking out loans, or applying for scholarships. It’s also a good idea to help them conduct a cost benefit analysis by taking into consideration their degree/major, public or private university, and income earnings potential post college.
- Don’t put college savings above retirement savings. I know it’s tempting- we always want the best for our kids. That said, sacrificing yourself financially for the sake of writing your children a blank check for education isn’t generous—it’s actually selfish. It would be much less expensive for a young adult to pay off a reasonable college loan than to bail out his or her parents who’ve run out of money in retirement and have health care bills piling up.
Planning for college can be complex and downright intimidating. Let’s not forget the sticker shock of what room, board, and tuition costs are these days and what they are expected to be in the future. The good news is that a successful outcome depends on two actions: 1) identifying your goals and 2) putting a plan in place to meet them. Just by thinking through these aspects of your plan, you’ve already taken the most important step forward.