Saving for College

The New York Times recently had an article that is one of the best summaries of the whole “how do I save for college” thing that I have seen. It is a very complete and thorough dig into the various facets; I highly recommend that you read it.

But for those of you that don’t click through, here is the cliff notes version:

College is expensive.
But really, seriously. And it is getting worse.

Who Should Save
Anyone who has some free cash flow should save. Every little bit helps.

But generally, we consider it important to fund retirement goals before funding college goals for kids.

And definitely, don’t put money into a college fund if you have credit card or other consumer debt.

How Much to Save?
Contrary to popular belief, having the entire amount in the bank you might need before college starts, isn’t always the best plan

Start with a plan – how much do you want to fund? The full price of an Ivy League? The price of in-state tuition? Do you want to pay for the whole thing, or do you want your kids to have some skin in the game? I usually advise clients to have the kids take at least SOME student loans – if for no other reason than to make them understand that college is an investment – and they need to be smart about investments (and you can always help more later, once the lesson is learned).

The sooner you start, the better. Compound interest/earnings is amazing. My favorite “congratulations on your baby” gift is $100 into a 529 account.

I like the idea of “thirds”:

  • Have one third the cost in savings
  • Pay for one-third of the cost from your income while the kids are in college
  • Have the student (possibly with your help) take out loans to cover the other third

Where Should You Save?
529s are the de facto answer. The vast majority of college savings are going here because they are the newest and generally best vehicles.

They have the downside of limitations – if your kid doesn’t go to college or doesn’t need the money you can’t use the money for anything else without paying a penalty.

But many states will give you a tax credit or a deduction for depositing money. So MAKE SURE to check your state – those incentives can make a big difference.

As with all investments, a well-diversified and low-cost investment strategy is usually the best over the long run. Set it, get the fees lower, and let it go.

Other Savings Options
Many states and state university systems offer prepaid tuition programs. Example: you can pay NOW (at current prices) for University credits. If you have the means, I always like this idea, especially in larger states like California or Texas. The obvious limitation here is that if they don’t go to a school in your state, the money is wasted. But in a larger state like Texas or California where there are many college options, this can be less of a factor.

Another type of IRA for education. They are somewhat old and outdated compared to 529s.

ROTH & Investment Accounts
This gives you more flexibility – just put the money into an investment account. You lose the tax deferral in some cases, but you can use the money for anything – which can be handy.

Generally considered, by modern planners, accountants, and lawyers to be a BAD idea.

In summary: Have a plan, automate it as much as possible, and leave it alone. You’ll likely end up OK.