Planning Insights
Ignorance Might Be Bliss, But It Won’t Fund College
Why increasing college tuition costs make it even more important to start saving early, and how you can start funding your child or grandchild’s education now (even if they aren’t born yet).
I was talking with some new parents recently and the subject of college tuition and savings came up. They said, “we know it’s important, but we’ve got plenty of time.” This is something we hear consistently at North Berkeley Investment Partners, but all too often we end up talking with middle-school and high-school parents who are just starting to save and are overwhelmed with how they’re actually going to make this work.
In 1987, the year I was born, the tuition costs for Stanford University for one year including room and board were $16,835. Today that same year will cost you $57,815. And if current trends hold, by the time my son graduates high school and is ready to spread his wings, Stanford will cost a staggering $139,000 for a single year! It’s no wonder parents feel uneasy thinking about funding four years each for multiple children, but that is where prudent planning can be so helpful. The same rules of compounding growth that result in staggering college costs can also work in your favor when your child’s college savings are growing over 18+ years.
One powerful way to begin saving for college is through a 529 plan. This plan offers benefits including tax savings, and also provides a way for you to start a regular savings plan and a possibly even get friends and family involved.
The beauty of a 529 plan is that contributions grow tax-free until they are needed; withdrawals from a 529 plan are also tax-free as long as the proceeds are used for higher education expenses – which include tuition, books, and room and board. These savings can be used for traditional undergraduate degrees, trade or technical schools, and graduate school.
Believe it or not, you can actually start a college savings account before a child or grandchild is born. In most cases you can open an account with yourself as the beneficiary and then can simply update the beneficiary when the child is born. My wife and I decided to go this route for our first child (due next month). We have been touched by how many friends and relatives are eager to contribute to something as meaningful as a college education for our new arrival. You can even split the account in two if you have a second child or grandchild on the way.
As we work with clients, we find that the decision to start a 529 is usually an easy one; but it leads to careful consideration of other factors. How much should I be saving each month given my current income and other expenses? Should I use my home state’s 529 plan or a different one? How do I balance saving for college with the need to save for my own retirement? Am I intending to fully fund college or should my kids contribute a piece of their own tuition? What if my parents want to help pay for their grandkids’ college, what the best way to do this?
Moral of the story: start saving early. Whether it is in a 529 plan, buying some savings bonds, or just sending money to a separate savings account, the best thing you can do is start saving early in order to reap the greatest benefits from compounding growth.
