I have been saving for my kids’ college education almost since they were born. It’s been at the forefront of my mind ever since. At the same time, it occurs to me that it’s easy to become obsessive about such things and that a little caution and a lot of prudence can go a long way to making sure that kids’ education expenses are part of a balanced savings plan rather than the monster that eats all of our income. Some tips for maintaining a balanced financial outlook include:
Don’t forget about your retirement.
Much like the admonition we get at the beginning of a commercial flight, put on your own mask before you assist others: in this case your children. As important as your kids’ education is, they will have more access to funds and to aid for their school than you will as a retiree. Importantly, even if they have to borrow, they’ll have many years to pay off their student loans at a favorable, fixed interest rate. Keep the time value of your dollars in mind and weigh the costs and benefits if you’re considering diverting savings from your retirement to your children’s education.
Speaking of the time value of money, use the power of compounding interest and dividend reinvestment to your advantage. A small, regular contribution to a college savings account over a longer period of time is both more manageable and can yield greater ultimate benefits than panicking and cutting out all of life’s comforts three years before your son or daughter walks onto campus.
Invest in Equities
Start early, and when you begin to build a college savings portfolio, lean toward stocks. They will be more volatile than a CD, cash or bonds but in the long term – and with sound advice from a trusted financial advisor – you will see a greater return on the money you’ve put away. Then, as your children get closer to college age, slowly start to move your portfolio into more conservative and stable, though slower growing alternatives, like bonds, savings or money market accounts. That way you’ll have the advantage of growth early on and the opportunity to preserve your gains as the college years approach. Mutual funds are an excellent way to take advantage of the potential gains in the stock market without the risk to your investment that purchasing individual stocks without professional advice might pose.
Use 529 Savings Plans
A relatively safe, managed alternative to saving on your own is a state or private-fund sponsored 529 College Savings Plans. These plans are available to most everyone without restrictions on income, or the age of the college bound beneficiary. The types of investments offered by 529 savings plans are limited and tend toward the conservative, but they also offer a much more favorable return than bank rates in most cases. In addition, you get some breaks on your federal taxes as well as in most states. In today’s inflationary tuition climate, you can save up to $200,000 for each beneficiary under a 529 plan. I would anticipate that unless college cost increases are somehow curbed, that the maximum savings limits will continue to increase as well.
Think of Your Savings as a Subsidy, Not a Full Ride
Even if you don’t save enough to pay for four full years of your children’s college, it’s not the end of the world. There are plenty of subsidized loan programs out there, as well as grants, that are available to families of most income levels. If your savings fall short, you’ve still managed to put a good dent in the cost of college; use the affordable loan programs to make up the difference.
Tax Benefits Exist for Parents of College Students as well as Student Borrowers
Currently, interest on student loans is tax deductible at the federal level as well as in many states. In addition, the IRS offers two tax credits – the Lifetime Learning Credit, as well as the American Opportunity Tax Credit – which reduce the amount of your actual tax during the years in which you pay tuition.
Student Loans Are More Flexible Than Other Types of Loans
Not only is the application and qualification process for student loans – at least those guaranteed by the government – much less restrictive than that for a mortgage, or even a car loan, the interest rates tend to be relatively favorable in comparison to many other unsecured consumer loan products like credit cards. Another piece of good news about student loans is that their repayment terms can be quite flexible and made contingent upon income. A number of scenarios, such as joblessness or community service, can even defer the need to make payments until gainful employment is secured.
Saving for college can be a nerve-wracking proposition for a parent. But if you make it part of a balanced financial savings plan and start early enough, you’ll get your kids through college with less stress – about money, anyway.