The birth of a child brings joy… and it brings challenges, with none causing more angst for most parents than the realization that in 18 years they could face a college bill to the tune of some $250,000 (in today’s dollars for a private institution).
The statistics are sobering. Americans owe over $1.4 trillion in student loan debt, spread out among about 44 million borrowers. In fact, the average student graduating in 2016 walked away from college with a diploma and $37,172 in student debt, up 6 percent from last year, according to Student Loan Hero, an organization dedicated to helping students manage their debt.
The good news is there are many specialized savings accounts and financial strategies available to parents to help prevent runaway debt for their children. The key, experts all agree, is to make saving for college part of an overall financial plan that comprises multiple areas of personal finance including taxes, investments, debt, cash flow, and financial aid.
“You need to review all your goals to better understand what’s most important, and create a plan as to how much you can contribute to your child’s college experience,” says Teri Conklin, senior vice president of wealth management at UBS Financial Services in Northbrook. “Working with an advisor can help you determine your cash flow and take a holistic view of everything you want to accomplish in life.”
Undoubtedly, 529 plans are the most popular college savings investment vehicles. A 529 plan, also known as a Qualified Tuition Program, is a tax-advantaged savings plan designed to encourage saving for future college costs. You typically invest after-tax money into the plan, and you’re then allowed to withdraw the funds and any investment gains tax-free for use toward qualified education expenses, such as college tuition and books.
These plans are sponsored by states, state agencies, or educational institutions, and are authorized by Section 529 of the Internal Revenue Code.
It’s important to recognize that there are two types of 529 plans: prepaid tuition plans and more general college savings plans. Prepaid tuition plans generally allow you to pay for portions of your child’s college tuition now, locking in current prices and hedging against future tuition hikes. Most prepaid tuition plans are sponsored by state governments and have residency requirements. A friend who lives in Virginia, a state with a wide range of public colleges and universities, has funded pre-paid tuition plans for his two sons, knowing that they will likely find a good college fit among the Virginia schools.
Conversely, withdrawals from college savings plans that simply grow over time and are not prepaid tuition plans can generally be used at any college or university. Coverdell Education Savings Accounts are another type of savings tool that allows savers to make after-tax contributions, but with a maximum $2,000 per year contribution per beneficiary.
It’s a common theory that it’s never too early to start saving for college, even before a child is born. However, “with other options to finance college such as loans, grants, and scholarships, it’s smarter to start saving for college once your retirement savings are comfortably underway,” says Stacey Riley Baker, co-founder of Riley Baker Educational Consulting in Winnetka. “I know my kids don’t want me living in their basement one day.”
What about asking your child to have some skin in the game? In theory, it seems like a good idea. But the office of Federal Student Aid (FAFSA), a part of the U.S. Department of Education and the largest provider of student financial aid in the nation, doesn’t see it that way.
A student doesn’t lose any financial aid if they have $3,000 or less in a checking or savings account. Any more, and penalties start to kick in. So feel free to deposit small birthday checks from grandma and grandpa in a savings account in your child’s name, but if the account starts accumulating cash, put the money in your own account.
And speaking of gifts for children, in families fortunate enough to have an abundance of consumer products and experiences for their kids — toys, gadgets, vacations, etc. — consider asking relatives to make contributions toward college savings for birthdays and holidays. Personal financial expert Ilyse Glink, who is chief executive officer of Best Money Moves, which offers a product to companies to help its employees achieve financial wellness, says she and her husband always gave their children a “family gift,” and then spoke to them about contributions they would make for birthdays and holidays to their college funds.
“You’re setting up an intellectual goal and a value, and you’re putting money towards that,” Glink says. “It’s creating a sense of shared engagement in the child’s future. You help them understand that it’s not an entitlement.”
More from Make It Better:
- 4 Tips for a Strong Financial Start to 2018
- Should You Hire a Tutor for Your Child? 7 Things to Know
- 3 Financial Tips for Parents of Boomerang Kids
Susan Pasternak has worked as a journalist for more than two decades, reporting and writing on myriad subjects ranging from national health care policy to personal finance to head lice. Her work has been published in numerous consumer and business publications. Susan lives with her husband, three children, and dog Roxy in Highland Park. She also volunteers with Working Together, a Highwood/Highland Park organization that provides enrichment opportunities to under-resourced children in the community.