If you are having a tough time putting aside money for your child’s college education, you are not alone. A recent study shows that fewer than half of all parents are making college savings a priority, while those who are saving for future education expenses are having a hard time keeping pace with the rising cost of a four-year degree.
“Parents understand the importance of saving for college but putting theory into practice is easier said than done,” said Ipsos Vice President Michael Gross, whose market research firm conducted the study “How America Saves for College 2015” for lender Sallie Mae.
With the average cost of tuition, fees, room and board for the 2015-2016 school year reaching $19,548 at public colleges and $43,921 at private colleges, saving for college has become increasingly challenging for the average family.
While saving for an infant’s college education may seem like a pipe dream to new parents who are stretching dollars to pay for diapers and baby gear, there is no question that it is the best time to start saving.
“[The] Sooner the better is always the proper mantra to listen to,” says personal finance writer John Wasik, author of “The Debt-Free Degree.” “You get compounding over time, you get earnings reinvested. The more time you have to save the better off you are going to be. It is really tough to play catch-up.”
The “2015 How America Saves for College” study found that the majority of college-savers are using traditional savings accounts (48 percent) or checking accounts (23 percent) to sock money away for college expenses. Only 27 percent were using 529 College Savings plans, a tax-advantaged account, which gets high marks from most financial advisors.
Joseph Montanaro, a Certified Financial Planner® with USAA, recommends investing college funds in a 529 College Savings Plan, which provides not only ease of use and low minimum contribution levels but also enable investment earnings to grow tax-free as long as withdrawals are used for qualified education expenses. In addition, investing in your home state’s 529 Plan may provide state income tax savings.
“The unique tax advantages that come with a 529 College Saving Plan make it my vehicle of choice for college savings,” he says.
Montanaro says “safer, more stable” investment choices such as CDs, savings and checking accounts do have a place in a college-saver’s portfolio, especially as kids approach college age. However, he cautions parents about a cash-only approach when building a college fund.
“Inflation is a threat that has to be dealt with, typically by saving more or incorporating investments that have historically outpaced it,” he says.
While 529 plans offer a wide range of investing options, Wasik believes aged-based plans, which automatically and gradually shift funds to less-risky portfolios as a child nears college-age, are the best option for most families.
“If you don’t choose them, you have to figure out the percentage to have in stocks and bonds. People mess that up all the time because it is not easy to do, especially over a period of 18 years. If you are late starting to save, it is even tougher because you can’t take market risks.”
Here are other college savings options:
Post-9/11 GI Bill: Eligible service members may transfer all 36 months or a portion of their unused education benefits to one or more of their children (or spouse). Service members must have at least six years of service and agree to serve four additional years from the date the transfer is elected. Transfer requests must be submitted and approved while the member is on active duty.
The Choice Act, which requires colleges and universities in all 50 states, Washington, D.C. and Puerto Rico to charge in-state tuition rates to individuals using Post 9/11 GI Bill benefits, applies only if a veteran or an individual using transferred benefits enrolls in the school within three years of service member’s discharge from active duty.
Yellow Ribbon Program (YRP): A handful of universities — Colorado State University, Drexel University (Pennsylvania), Northwestern University (Illinois), Florida State and the University of Miami, to name a few — do not limit the number of YRP scholarships available to eligible veterans (and children using transferred benefits) nor set limits on the school’s contributions. Picking an out-of-state public or private university that offers a generous YRP is one way to ensure your child’s tuition costs are zero.
Prepaid tuition plan: A prepaid tuition plan allows the purchase of college tuition credits at today’s prices to be used for future college expenses at participating colleges and universities in a state. Typically, the best value comes from using credits to attend a public university in your home state, but a plan’s funds can be transferred to private and out-of-state colleges. Florida, Michigan, Texas, Virginia and Washington are among the 20 states offering prepaid plans, the terms of which may vary considerably.
Coverdell Education Savings Account: Contributions are capped at $2,000 per year, per beneficiary, but investment earnings are exempt from federal taxes. Unlike a 529 plan, contributions can only be made until a beneficiary reaches age 18 and all funds must be withdrawn by age 30. There are also income-based contribution phase-outs and other restrictions.
UGMA/UTMA: The Uniform Gift to Minors Act/ Uniform Transfers to Minors Act is a custodial account in which the account’s assets are designated for the child, but do not have to be used solely for education. While these accounts offer some tax advantages and flexibility in how funds are invested, the money belongs to the beneficiary when the child reaches the age of majority, which varies by state.
U.S. Savings Bonds: Qualified taxpayers can exclude interest earned on Series EE and Series I bonds issued after 1989 when redeemed for higher education expenses incurred during the same year. Income limits apply.
UGift or GradSave Gifts: These free-to-use services enable family and friends to make contributions to your child’s education. Gifts are transferred to a participating 529 plan.
Upromise: Allows families to earn cash back for college when shopping online, dining out or booking traveling. Grocery and drug store loyalty cards can be added to boost savings. Cash-back earnings can go into a 529 plan, help pay down eligible student loans or be withdrawn by check.
Marine Corps spouse Salina Kahalehoe McBride of Quantico, Va., uses Upromise for all online purchases. “I consider it similar to a 401K,” says McBride, who also has family and friends contribute their rewards to her account. “I am going to purchase it anyway. Why not get free matching or better? A definite win-win.”
How far your college savings stretch may be wholly dependent on a college’s sticker price. Eric Dawson, a college counselor at Kent Denver School in Colorado, says families too often get swept up in college rankings and fail to look at lower profile schools (including community colleges) that may be a better (and cheaper) fit.
“It is a hard message to get through because our society and human nature is based on hierarchy and status,” Dawson says. “It’s no different and no less superficial than if we were talking about cars. You could look somebody dead in the eyes and say a Honda Accord will get you from point A to point B as well as a Mercedes, but which is the best? If your definition of best requires leather seats and a higher price tag because of the name recognition, then it’s a different conversation.”
No doubt the biggest financial decision many students will make is deciding where they go to college. Military spouse Ellie Kay, a family financial expert and author of several books, including A Mom’s Guide to Family Finances and Lean Body Fat Wallet, recommends children not be given the option of attending any college they get accepted to. Kay points out that two of her children went to high-profile/high-cost private universities, but only because they received large scholarships that enabled them to graduate debt-free.
“One of the biggest mistakes is going to a college you can’t afford,” Kay says. ”Going to Stanford may be really wonderful, but if you are going to graduate with $100,000 in student loan debt because you’re not getting much in the way of scholarships, graduating from UCLA with $20,000 in debt, would be better.”
Lynn O’Shaughnessy, author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price, says a school’s net price — the difference between the cost of attendance and the amount a student receives in grants and scholarships — is the number on which parents should focus.
“People need to understand how schools are priced and how they decide who gets grants and scholarships and financial aid and who doesn’t,” O’Shaughnessay explained. She recommends parents use the Expected Family Contribution Calculator atwww.bigfuture.collegeboard.org to estimate the minimum amount their family will be expected to pay per year based on their income, family size, assets and number of children enrolled in college.
Wasik also reminds students to chase as much “free” money as possible in the form of scholarships offered by corporations, non-profits and other outside sources. However, families do have to be aware that scholarships from “outside” sources may reduce need-based financial aid, potentially leaving their family contribution unchanged.
“There is $6 billion in scholarship dollars out there that people don’t look at or claim,” Wasik said.
To help families understand their bottom line, the Consumer Financial Protection Bureau at www.consumerfinance.gov/paying-for-college/compare-fiancial-aid-and-college-costs provides a tool that helps students compare costs and financial aid packages from competing schools.
When it is time to sign on the dotted line, Kay reminds parents not to go into debt or use their retirement funds to fuel their child’s college dreams.
“If you leverage your future for your child’s future, eventually that child is going to be taking care of you. In the long run, that doesn’t benefit anyone. It is far better for them to be self-sustainable and for you to be self-sustainable in your older years because you have planned for retirement adequately. Then it’s a win all the way around.”