By Matthew Gaude & Shawn McGuire
Regardless of whether your child is two or twelve, the thought of college has probably crossed your mind. In the busyness of life and never-ending financial pressures, it is all too easy to put saving for college on the back burner. But before you know it, you’ll be planning college visits and filling out applications.
Don’t get caught unaware and unprepared for college. Your child’s education is one of the most important investments you can make, and with today’s costs, it pays to plan ahead. As we celebrate National 529 College Savings Plan Awareness Day, it’s a good time to ask yourself this question: Have you started saving for your child’s future education costs? If not, it’s time to consider these five steps.
1. Know What to Expect
College tuition gets more expensive every year, and the numbers can cause anyone to break out in a sweat. Tuition rates have increased at a faster pace than many other expenses over the past decade and it doesn’t look like they will slow down anytime soon. In the past ten years, college costs have risen an average of 2.4% a year for private schools and 3.5% for public colleges.
The following table shows the average cost for one year of tuition (not including other school costs).
If this upward trend continues, in 25 years it could cost $300,000 to obtain a four-year undergraduate degree. The costs will vary depending on the institution attended, room and board, and other educational expenses, but either way, that’s a pretty penny for four years of school. For a 2017 graduate, the average student loan balance was over $37,000 and the average monthly student loan payment is $351. For students just beginning their careers, that’s a hefty bill to pay. The substantial cost may seem overwhelming, but knowing what to expect gives you a goal to aim for.
2. Make it a Habit to Save
It’s never too late or too early to start saving for your child’s college fund. By starting early, you can reap the rewards of compound interest. If you wait, your account balance may not be as high, but you are still investing something in your child’s future.
Even if you don’t think you have enough room in your budget to add another line item, $25 a month is still $25 more than $0. Setting up automatic contributions is a good way to remind yourself that college is getting closer and your monthly account statement will keep this goal in the forefront of your mind.
3. Evaluate Your College Savings Options
The most common method people use to save for college is through a 529 plan. A 529 plan is a state-sponsored education savings account that allows earnings to grow on a tax-deferred status. There are two categories of 529 plans: prepaid tuition plans and college savings plans.
Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, can be enticing. On the other hand, college savings plans have no age or income restrictions and allow you save up to $300,000 per child in many state programs and then use it, tax-free, for qualified education expenses. As an added benefit, you are not limited to using the plan offered by the state you live in. Some states give you a tax credit for using their plan, but in many cases, it’s worth it to shop around.
Beyond 529 plans, some families use Roth IRAs. Your Roth contributions can be withdrawn at any time and can be used for any purpose. In addition, Roth IRAs can help you avoid the high fees that some 529 plans charge and they also offer virtually unlimited investment options. IRAs will not have any impact on your financial aid eligibility.
For college savings, Roth IRAs aren’t the perfect option, but they do offer an alternative to the traditional 529 plans. Think about opening a 529 plan for college, but also continuing to contribute to a Roth for retirement. This strategy gives you extra resources to draw on if you need them.
4. Divide the Cost of College into Thirds
While some people are able to save and pay for the total cost of their child’s college education, most people don’t fit into this category. Instead of letting that fact get you down, break the cost of college into thirds.
The first step is to save before your children head off to college. By starting early and having some help from the markets, you can accumulate a solid base to use for tuition as well as room and board. The next step is to plan on paying for about one-third of the costs while your child is in college. This can be through a combination of scholarships, grants, a part-time job for your child or contributions from the family. The final piece is student loans that your child or you can repay after they have completed their education. Since the goal is to minimize student loans, try to maximize the first two parts of this three-pronged strategy first.
5. Monitor Your Investments
Just like your 401(k) plan, you need to monitor your college planning investments. In the early days of saving for college you will want to be more aggressive with your investments, but as college draws closer, the investment allocation should become more conservative, just like a retirement account. It is also helpful to monitor your balances, keep an eye on the changing college costs, and track your progress towards your goal.
If you think a 529 plan might be a good idea for you and your family, we are here to help. We can explain all your 529 plan options and help you decide which is best for your individual college planning needs. If you already have a 529 plan set up, it is important that you have an experienced professional managing the investments in your account. The investment allocation should line up with the age of your child, and the investment risk should be gradually reduced as the child gets closer to college.
Let us help you prepare for the future. With our guidance and expertise, you can start saving for your child’s future today so you can ease the worries of tomorrow. To get started, schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.
Potential investors of 529 plans may get more favorable tax benefits from 529 plans sponsored by their own state. Consult your tax professional for how 529 tax treatments and account fees would apply to your particular situation. To determine which college saving option is right for you, please consult your tax and accounting advisors. Neither APFS nor its affiliates or financial professionals provide tax, legal or accounting advice. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value.