Saving for College
According to a 2011 report by the Census Bureau, a college graduate can earn over 80 percent more during his or her lifetime than someone with just a high school diploma. But that advantage comes with a price tag. Currently, the annual cost of a four year private college can top $30,000 for tuition, fees, and room and board, according to a 2013 report by the College Board. A sound savings and investment strategy can help put your children (or grandchildren) on the road to a valuable four year college degree.
When investing for any large financial objective, it’s best to start early and invest often. First, set your goal by estimating how much you will need to accumulate for each child based on his or her age. Then, develop a plan and stick with it.
If you have time on your side (12 to 18 years), consider investing the majority of your college assets in stocks and equity mutual funds, as these investments have historically provided the greatest long-term growth potential (of course, past performance can’t guarantee future results). Naturally you should consider the volatility involved with equity investing and your ability to ride out potential fluctuations.
As college matriculation nears, you’ll probably want to add or increase a fixed-income element to help balance risk. Also, consider teaching the college-bound student about investing and savings by encouraging that a portion of the money earned through part-time jobs be contributed to the college savings plan.
When investing for college, there are several options to consider, though my favorite vehicle is the 529 college savings plan. These state-sponsored plans allow individuals to invest in predetermined, professionally managed investment pools. All earnings and distributions are tax free if used for qualified higher education expenses. There is a penalty if funds from a 529 plan are used for non-qualified expenses (such as car payments). If for some reason your student doesn’t need the saved funds (such as a full or partial scholarship), they can be withdrawn penalty-free (though earnings will be taxed). Or you can change the beneficiary and use the savings for another member of the family.
Lifetime contribution limits to 529 plans often exceed $200,000; more than enough to fully fund a four year education at most colleges. In addition, each parent or grandparent can contribute up to $14,000 annually or make a lump sum contribution of $70,000 every five years (up to the plan’s lifetime contribution limit) without triggering gift taxes. There are also no income restrictions, so anyone can contribute to a 529 plan.
529 plans vary widely, with some states offering plans sold through brokers while others are offered direct to the public. Broker-sold plans often come with upfront sales charges and may include ongoing account servicing fees for the broker, too. Plans (including California’s) that are sold direct to the public typically have lower costs which often translate into better long-term results.
Any savings will also affect a child’s eligibility for financial aid, so it’s important to develop a strategy which takes this into consideration. Assets of a child, such as custodial (CUTMA) accounts are weighted more heavily against financial need than are assets of the parents. Grandparents’ assets (including 529 plans that benefit the child) are not considered until a distribution is actually made.
Saving for college enables a student to graduate with minimal debt, giving that student a leg up on their own financial success. You can learn more about these plans at www.savingforcollege.com, or by scheduling an appointment with a Certified Financial Planner® professional.
This column is prepared by Rick Brooks, CFA, CFP®, with the assistance of the Financial Planning Association. Rick is Vice President for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick can be reached at (858) 755-5166, or by email at brooks@bfadvisors.com. Rick and his family live in Mission Hills.
Category: Local News
