Today is National 529 Day. Just another day on the calendar to get you thinking about how you will support your children’s college education. I have noticed over the past several years that college education is one of the areas that people in their 40’s and early 50’s are WAY behind in when it comes to planned savings. I’m also seeing much more discrepancies between spouses and partners alike about what is the best way to plan for this goal. Should your kids go to an in-state school? Should they go to the college of their choice? Should you plan for an ivy league private school? What happens if they just cross the border and go to a state school in a bordering state? Imagine you get home from work one day and your child has the magical letter from that college or university that you both always dreamed they would attend? Will you have a plan in place that makes sense for your child and your personal family finances that won’t break the bank?
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Many financial plans that I see often use blanket assumptions. When you start thinking about college education planning, it is important to have a lengthy discussion with your financial advisor as well as within your family unit about what you want the picture to look like so you can backtrack into the right assumptions. I have three children soon to be 12, 14, and 16, so I have known for years that kids grow up too fast, college is getting more expensive, and it is never too late to start planning for their future. The good news is that you have more options than ever before on the ways you can save for this important goal. What are the key assumptions you should be thinking about for college education? Here are your smart money moves:
- How do you plan to finance their college education? – Essentially, there are four options you could consider about how you will assist in paying for your child’s college education. You could pay as you go, although I strongly don’t recommend this, which means placing a heavy dependence on the fact that your job will continue to produce a consistent income stream while your children are in college. You could choose to pay later, which means borrowing or financing your kid’s education like a mortgage and paying it off over time. However, this could hamper other goals you have like paying off your actual mortgage or whether you’ll be able to make work optional when you want. Additionally, you could find someone else to pay, which could be a combination of relatives, financial aid, grants, scholarships, etc. which can be viable if you plan skillfully. The last thing you can do is to save for the goal, which requires important planning and discipline to reach the goal.
- What do you think the rate of inflation is going to be for college costs? – According to The College Board, the average 2010-2011 tuition increase was 4.5 percent at private colleges and 7.9 percent at public universities. The ten-year historical rate of increase is approximately 6 percent. (source: www.savingforcollege.com) This 6% number is almost twice the normal inflation rate over the last decade. If your financial plan has a normalized inflation rate being used across the board, this could substantially throw off the numbers of what you need to save for college. These numbers also don’t include other costs your child might have like computers, supplies, books, and transportation. Many people don’t factor in these ancillary expenses when they put their plan together.
- How much of the education do you plan to fund? – For a child enrolling into a private university in 2010, the total cost for tuition is factored at about $119,400 according to www.savingforcollege.com. If the inflation rate stays at 6% this number will be over $340,000 for a child born today. So the real question to determine when you have a new child is, “How much of the education do you plan to fund? Do you want to plan for a public education or a private education? Do you want to fund two years or all four years? Do you just want to give your child a head start?” Answering these tough questions provide you a really good baseline to understand your starting point.
- Can you expect any family help? – Although this can be a difficult conversation to have with your parents or grandparents, it is a very meaningful one so you can plan for your child’s future. Be sure to ask what support if any you can expect to get from family members. This isn’t a selfish and greedy question. It is vital to know this so you can plan to save your kid’s investments into the right type of vehicles for tax savings and liquidity depending on what the rest of your family may be doing to help. Sometimes parents or grandparents want to help, but they do not know the most effective way to save money and retain control of those assets.
National 529 day is a great opportunity about learning more about a type of vehicle that can help you save money for your children’s college education. Before you do that, it is a great idea to sit down and put a plan together just like you would for anything else you have been successful at in the past. For Gen X’ers, saving for college education and retirement at the same time is going to be a tricky balance while they attempt to maintain their currently lifestyle. Wouldn’t it be great for your child to open that letter from the college they always wanted to attend and you have the power to know that you planned well for that magical day so cost is not an issue? Use these four smart money move questions to help you get started on the road to that dream!
Written by:
CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Editor in Chief of your smart money moves
Co-CEO and Founder of oxygen financial, inc – The Leaders in Gen X & Y Financial Advice and Services
Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
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