Saving for College: A Collaborative Plan for Your Child's Future

‍5 Key Points:

1. Define Your Goals: Discuss your vision for your child’s college experience – Ivy League, state school, etc. – and your family's financial expectations.
2. Partner Planning: Collaborate with your spouse on a savings approach and communication strategies with your child.
3. Estimate Costs: Use College Net Price Calculators, the College Scorecard, and other tools to project future expenses.
4. Choose the Right Savings Vehicles: Focus on 529 plans for their tax advantages and flexibility, with a strong emphasis on scholarships as an essential part of your child's college funding plan.
5. Start Now & Automate: The earlier you begin saving, the more time your assets have to grow. Set up automatic contributions for consistency.

The rising cost of college makes early planning essential. This guide walks you through the process—from defining your goals and estimating costs to choosing the right savings vehicles and creating a realistic savings plan.

Understanding Your Goals: Setting the Stage for Success

Before calculating numbers, defining your vision for your child's college experience is crucial and needs to be clearly defined. Here's how to get started:

• Plan Realistically: Do you envision an Ivy League institution, an in-state public college, or something in between? Consider a range of options and be open to possibilities. Are you planning to cover all costs, or do you expect your child to contribute with part-time work, loans, or scholarships? This decision impacts everything from your savings strategy to how you talk about college with your child.
• Spousal Collaboration: Open communication with your spouse is paramount. Discussing your financial contributions as a couple prevents misunderstandings and helps create a unified savings strategy. It will also help in the future when you begin talking about schools with your child and discuss touring colleges. 

Tools for Estimating College Costs

Once you have agreed on the general idea of the desired school type and the goal amount of years you plan to save for, it's time to estimate the costs. Here are some powerful tools to help:

• College Net Price Calculators: Many colleges provide "net price calculators" on their websites. These tools consider your family income, assets, and other factors to give a personalized estimate of financial aid eligibility and likely out-of-pocket costs.
• College Board's BigFuture: The College Board offers a comprehensive website (https://bigfuture.collegeboard.org/) with cost calculators, scholarship searches, and information on thousands of colleges.
• The Department of Education's College Scorecard: The government's College Scorecard (https://collegescorecard.ed.gov/ ) provides data on tuition, average debt, and graduation rates for various institutions.

Exploring Your Savings Options

With your goals in place, let's explore different ways to save for college:

• Traditional Savings/Brokerage Accounts: Simple and accessible, these accounts are convenient but do not offer tax-free growth like other options. Some of your future funding may come from these sources, but it should not be the primary vehicle.  
• Coverdell Education Savings Accounts (ESAs): Offer tax-advantaged growth and withdrawals like 529 plans, but contribution limits are much lower.
• 529 Plans: State-sponsored investment accounts designed specifically for college savings. These plans often provide tax advantages and a broad range of investment options. This Forbes site provides a high-level overview of the available plans and if they offer tax deductions in your state. Remember, you have the option to choose a plan in any state if the fees are better. In some cases, the plans offer such poor investment options that it can make more sense to forgo the tax deduction available and choose a plan out of your state.
• UGMA/UTMA Custodial Accounts: While these provide flexibility, be aware that funds can be used for non-educational purposes, and they could impact financial aid eligibility. Contributions to these accounts are considered irrevocable gifts, and once your child reaches the Age of Majority (which can vary by state), the child has complete control of the account—i.e., they can buy that tricked-out Jeep they have always wanted! These accounts are also considered the child's assets for FASFA and weigh heavily against any potential financial aid. 

Important Note: Scholarships can significantly reduce out-of-pocket college costs. Encourage your child to start researching and applying for scholarships early. Here are some popular resources (Purpose Built has no affiliation and have not vetted these in any way): 

• https://www.fastweb.com/
• https://www.scholarships.com/

The Power of 529 Plans for High Earners

529 plans hold several advantages, making them by far the most popular choice for high earners:

• State Tax Deductions: Contributions to your home state's 529 plan may be tax-deductible up to a certain limit. This varies significantly by state, so verify the situation in your home state. 
• Tax-Deferred Growth: Earnings within the 529 plan grow tax-free, allowing your money to compound more effectively over time.
• Tax-Free Withdrawals: Money withdrawn for qualified higher education expenses is generally free from federal and state income taxes.
• Flexibility: You can choose from various investment options, from conservative to more aggressive, based on your risk tolerance.

Purpose Built's Approach

We generally recommend saving for approximately 2.5 years of college expenses within a 529 plan and utilizing other sources to cover the remaining 1.5 years. 

Note: This recommendation is general and should be assessed based on your financial position and goals. A comprehensive financial plan must be completed to determine the appropriate target for your situation.

However, the Secure 2.0 Act introduced a new opportunity: rolling up to $35,000 (lifetime limit) from a 529 plan into a Roth IRA in the beneficiary's name. This provides additional tax-advantaged growth potential for your child's future. Depending on your financial situation and goals for passing assets onto your children, this new opportunity may increase your targeted amount in a 529 above 2.5 years. 

A goal of 2.5 years is still a good baseline for most people, so we will use that in our example. 

Calculations for Achieving Your Savings Goals – Including Inflation

Let's use an example to illustrate the calculation process, including adjustments for inflation:

1. Estimated Cost: Imagine your goal is to fund four years at an in-state college, with an annual cost of $25,000 in today's dollars (as of this writing, the average is $27,940).
2. Inflation Factor:  Historically, college costs have risen faster than general inflation. We'll assume a 4% annual increase for college expenses. You may see higher figures quoted in articles because they often use the listed price or "rack rate" (a term borrowed from the hospitality industry). However, few people actually pay the full listed price due to merit scholarships, which are essentially discounts from this inflated number.
3. Future Cost: In 10 years (assuming your child is 8), a year of in-state college might cost roughly $36,120 (calculated using a future value formula).
4. Total Cost: Four years would amount to approximately $144,480.
5. 529 Target: Aim to save 2.5 years, or $90,300, within a 529 plan.
6. Time Horizon: You have 10 years to save.
7. Investment Returns: Let's assume an average annual return of 7% on your 529 investments.

Calculating Annual Savings:

To reach $90,300 in 10 years, you would need to save approximately $6,445 per year (using a time-value-of-money calculator).

Taking Action: The Importance of Starting Now

Saving for college might seem daunting, but remember, every dollar you contribute today is a dollar less your child may need to borrow later. The key is to start early and take advantage of time and the power of compounding growth. Here's the bottom line:

• Make it a family project: Start by discussing college goals with your spouse to ensure you're on the same page. Agreement between parents is crucial. Next, include your child in age-appropriate discussions about college planning. This helps them understand the value of education and fosters a sense of shared responsibility.
• Automate your savings: Set up automatic contributions to your chosen savings vehicles. This removes the need for willpower and ensures consistent progress.
• Small amounts matter: Even if you can only start with modest contributions, the important thing is to begin. As your income grows, you can increase your savings over time.
• Seek guidance if needed: If you need clarification on investment options, tax implications, or need a personalized plan, consult a financial advisor specializing in college savings strategies.

A Brighter Future Starts Today

Saving for your child's college education is an investment in their future, opening the doors to opportunity and minimizing future debt burdens. By taking action now, you're giving them the gift of a brighter tomorrow. Let's get started!

If you have questions about planning for your college planning or want to explore how a Flat-Rate Fee-Only structure can help you achieve your goals, schedule a time to talk.

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Your financial well-being is too important to leave to chance. Choose wisely.

FAQ Section

Q:  What's the best way to save for college?

A: 529 plans are generally the most advantageous due to tax benefits and investment options. Consider supplemental savings strategies and emphasize the importance of scholarships.

Q: How much should I save for college each month?

A: Use online calculators to determine the amount needed based on your goals, the child's age, and expected investment returns.

Q: What if I can't afford to save much?

A: Even small contributions matter. Start early, automate savings, and research scholarships diligently.

Q: Do I need a financial advisor for college planning?

A: While not always necessary, a financial advisor can provide personalized guidance on investment options, tax implications, and creating a holistic savings plan.

Q: At what age should I start talking to my child about college?

A: Start simple conversations early and adapt them as your child grows. This instills the value of education and encourages ownership of their future.

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