Advice on College Saving

I’m personally interested in understanding college savings for both my own family and in terms of this web site. I found paying for college a challenge and hope to help my own daughter as much as I can. I imagine I’m not alone! I think it’s a real challenge for people who are also planning for their own retirement or mid-career changes.

I really believe in being able to pursue an education customized to your needs and dreams. I’ve often wondered how I can support my daughter in that endeavor, whether it means funding artistic or technical training or college. I’m sure she’ll come up with her own ideas as she decides what she wants to be when she grows up!

With this in mind, I asked a local CERTIFIED FINANCIAL PLANNER (TM), Brian Plain, whom I know through Twitter and have met a few times, to write about college savings for families.

What are the various strategies parents today have for saving for their kids’ college plans?

There are a number of savings vehicles available to parents to save for their kid’s college education expenses. Some of the most popular vehicles include:
College Savings Plans (also known as a 529 Plans)
Pre-paid Tuition Plans
UGMA or UTMA accounts (also known as custodial accounts)
Roth IRAs (which stands for Roth Individual Retirement Accounts)

The savings vehicle or vehicles that make the most sense for you will depend on your personal goals and objectives.

For example, do you want to help pay for your child’s future education expenses and if so, how much? Do you wish to do so at the expense of pushing back your own retirement? These are just a few of the questions you need to answer before developing a savings plan that makes the most sense for you.

How early should a family start planning for college savings?

In a perfect world, families would start planning for college savings at the same time they first start thinking about having kids. Unless you plan on paying for college out of pocket, the earlier you start making contributions to college savings, the more likely you are to see the benefit of compounding.

In other words, the $100 you invest when your child is six months old is likely to worth a lot more come time for college than the $100 you invested when your child is sixteen. One of the best things you can do prepare yourself for the cost of college is to start as early as possible. Make it a priority.

A book we read recommended just maxing out your retirement savings plans and using that when the time comes. What are your thoughts on that? Is it possible to save for both retirement and college without complete austerity?

My thoughts when it comes to planning for anything really are to never put all your eggs in one basket.

What I see many people do is worry only about what is right in front of them, which is often paying for college. Don’t ignore or neglect your own retirement. Remember, you and/or the student can take loans to pay for college, but no one is lining up to give you a loan for your retirement.

Is it possible to save for both retirement and college at the same time? Absolutely. Is it easy to do so? Of course not!

Financial Planning as a whole is an ongoing balancing act. Your thought process should be to figure out what’s most important to you and your family, find out what’s necessary to make it work financially, and then revaluate and decide what makes the most sense for your family.

Is it that important to pay for all of your kid’s college expenses upfront if it means you can’t retire until you are 80 years old? Would you rather have your kids take loans while they are in school and help them pay them off later on assuming your own retirement planning is on track?

There isn’t a right or wrong answer to any of these questions as it all depends on your goals and what’s most important to you. Just make sure to continue to ask and answer these questions when making any major financial decisions.

What if your kid doesn’t end up going a traditional university route but will need financial support for job training or non-traditional education? Are there products or plans that won’t help with that? Do you see any special concerns for this possibility?

This is a great question and brings up an important point to always remember whenever you’re doing any sort of financial planning.

You are planning for the unknown. The only guarantee is that things will not go as expected. Be ready to adjust your planning as you will absolutely need to do so.

All the savings vehicles I mentioned would still allow you to use the funds to provide financial support for job training and/or non-traditional education, but depending on the type of training or institution, you may lose some of the benefits of the savings vehicles.

For example, with a College Savings 529 Plan, the money within this account grows on a tax-deferred basis and can be withdrawn federally tax-free provided you use the money to pay for college or an expense defined as a “qualified educational expense” by the Internal Revenue Service.

If you use funds from a College Savings 529 plan to pay for a non-qualified expense, you would have to pay taxes on any earnings and would be assessed a 10% federal penalty on any earnings.

It’s important to be flexible in your planning as we can’t know with any certainty how everything is going to work out, but we can do our best to plan and prepare for a wide range of possibilities.

Brian Plain is an independent CERTIFIED FINANCIAL PLANNER (TM) located in Oak Park, IL. Brian helps families balance paying for college and saving for retirement at the same time. For more information about Brian and his practice, you can visit his website, Oak Park Planner.