Six grandbabies are due this year, among my friends and me. My pure happiness at anticipating these births is clouded only by the realization of the awesome responsibility that each new human being places on its parents, its family and its village.
This brings me to college savings plans. My usual baby gift is to help new parents set up a 529 plan (so called for the tax code that delivers its benefits) and make the first contribution to it. If you considered these plans early on but were dissuaded by their complexity and rigidity, it’s time to look again — for your kids or grandkids. They’ve grown up quite nicely.
529 plans offer generous tax benefits, generally without hurting a student’s ability to qualify for financial aid. Total assets nationwide have grown from about $8 billion in 2001 to $211 billion in 2014, which has meant more major sponsors, lower costs and better management. Originally they typically sold through advisors, but now it’s relatively easy to set up and manage your own account online.
In my financial planning business, I’ve heard quite a few reasons for not savings for kids’ college tuition. Here are a few, followed by my responses.
» 1. I expect my kids to get an athletic or scholastic scholarship. Good luck, and I hope you’re right.
» 2. I think they should pay for their own education so they’ll value it more. This is sound reasoning. I agree that students should contribute, by working part-time during their high school years and while in college. A great parental or grandparent strategy is to agree to a year-end match (100 percent, 200 percent, 1,000 percent, whatever) of any funds a child deposits into his or her 529 account. If college expenses seem out of reach to you, think how much more overwhelming they are to a kid who has never had the benefit of a salary. If you value a college education, you need to value it from baby’s birth.
» 3. There’s no way we can put away money for college — it’s too expensive. OK, this is pretty much true — at least for private college — unless you’re aided by grandparent money, have been very financially successful, or lucky. To save for a newborn’s annual tuition of $25,000 (present cost), you need to set aside $561 per month. (Assumptions: four-year matriculation, college inflation rate 5 percent, investment return 6 percent).
Nevertheless, you can go a long way toward launching your child into adulthood debt-free by breaking the task into digestible bites.
» Consider learning to budget as an essential part of your child’s education: teach by doing.
» Treat education savings as a “fixed expense” by setting up an automatic deduction from your paycheck to your 529 account.
» Consider a strategy of saving one-third of juniors’ costs while they are growing up, paying one-third as an ongoing budget item while they’re in college, and funding one-third by debt. Every dollar saved before college starts saves about $2 in borrowing.
» Use this rule of thumb for total education borrowing: Borrow no more than the first year’s expected salary. Corollary: Regardless of the current federal proposal, don’t count on Uncle Sam to bail you out!
Get started today by learning the nuts and bolts at SavingForCollege.com. Then set up a plan, or get help from a fee-only financial advisor. Think of the babies!
— Karen Telleen-Lawton’s column is a mélange of observations spanning sustainability from the environment to finance, economics and justice issues. She is a fee-only financial advisor (www.DecisivePath.com) and a freelance writer (www.CanyonVoices.com). Click here to read previous columns. The opinions expressed are her own.