When it came to saving for their kids’ college education, Nathaniel and Emilee Lindley had very different perspectives.
Although both attended St. Olaf College in Northfield, Minnesota, Emilee completely paid for her schooling by working and student loans, while Nathaniel’s parents paid his way.
“We think about [paying for college] a little bit differently,” says Nathaniel. “We came out of it with two different perspectives. So we agreed to pay for half of our kids’ college.”
Although the Lindley’s children are only 4, 9 and 12, financial planners say it’s never too early to start saving and planning. The cost of a college education continues to rise. According to CollegeData.com, for the 2013-14 school year, the average yearly tuition was $8,893 for state residents of public colleges and $30,094 to attend private colleges.
“We advise clients to start saving as soon as they can,” says Matt Siegel, a financial planner with Goddard Financial Planning in Seattle. “Parents need to put college in context of other goals. There’s lot of demands on cash flow. They also need to make sure they have a retirement emergency reserve. But college is a little trickier because they don’t have a lot of time.”
Before hiring a financial planner they reviewed on Angie’s List, the Richfield, Minnesota, couple was putting about $450 a month into a 529 college savings plan, but Nathaniel says he didn’t know if that would be enough to pay half of their kids’ college educations.
“We were completely unrealistic at the current level,” Lindley says, adding that the couple plans to at least double that amount. “[The financial advisor] adjusted how much we should be saving if we wanted to pay for half of college, and he suggested that it could be achieved this way.”
The Lindley’s financial advisor, Greg Ferguson, with Ferguson Financial in Minneapolis, says many parents insist on paying for their kids’ entire college. He says that can be an unwise choice, as it can leave parents with little savings for retirement or other expenses as they become empty nesters.
“You can borrow for college, but you can’t for retirement,” Ferguson says. “If the kid doesn’t have any skin in the game and isn’t planning on paying any back in the future, it makes it harder on the parents. The reality is parents often don’t have enough money and need to realistically think about what they’re willing to afford.”
Siegel says he’s seen parents pay for expensive private schools and end up broke. But he’s also seen people not save at all.
“Some people are under the impression they don’t have to save for college,” he says. “It’s just too expensive for them. They think somehow it will get paid for, and that’s a big mistake.”
Although it’s important for students to first apply for financial aid and seek out scholarship opportunities, there’s no guarantee either will be available when a child is ready for college.
Financial experts say even a little savings can eventually turn into a lot.
According to Federal Student Aid, an office of the Department of Education, putting away just $14 per week in an account that earns 1-percent interest will earn you more than $12,400 after 17 years.
Ferguson says it’s wise for parents to save for college through a tax-free savings program, like a 529, and not a typical savings account, which isn’t tax free.
While 529 programs are a widely popular choice for college savings, putting money in a Roth IRA and Coverdell Education Savings Account (ESA) can also be sound options, Ferguson says.
“I think the big thing is people aren’t aware that there are three really good options,” he says. “Everybody thinks it’s just the 529. College 529 plans can be a very good option, but it’s not the only one. There are other good saving vehicles to talk about.”
College 529 plans are designated just for college savings and plans vary by state. Funds can only be used for education and for the designated beneficiary, though parents can change the beneficiary to another qualifying family member at any time.
Unlike a 529 Plan, money saved in a Roth IRA can go towards retirement. An ESA, meanwhile, is like a 529 in many ways, but money can be withdrawn tax-free for any type of educational purpose, such as to pay for enrollment at a private elementary or high school, or for schoolbooks. However, there are income restrictions on both Roth IRAs and ESAs, so it’s important to consult with a financial planner to discuss the best option for your family.
“Using all three will give you a very good combined strategy,” Ferguson says. “It’s going to give you more flexibility.”
Siegel, though, typically recommends sticking to the 529 Plan for college savings. He says using a Roth can end up taking away money for retirement, should you dip too far into that bucket to pay for college expenses.
“You need to put money away where it’s going to be used,” he says. “You should have separate pots for retirement savings and college savings.”
Financial advisors can help calculate how much money you’ll need to reach your goal of paying for your kids’ college.
“I’m not a financial expert,” Nathaniel Lindley says. “I could generally tell that [Ferguson, my financial planner] likes doing it. He takes a look at the whole picture.”
Siegel adds that a financial planner will help put your financial goals in context to other priorities, such as saving for retirement.
“We can help you with and tell you how much money you’ll need to save to reach that goal,” he says.
Ferguson adds that it’s a good idea to meet with a potential planner before hiring him or her to help with your college savings. Some financial planners are independent advisors who are generally paid for their time, while others may represent particular investment products and are paid by commission. Be sure you’re clear on how you’ll pay your financial advisor.
“Besides all the fiduciary and certification stuff you have to feel comfortable with the person, as you may be working with them for a very long time and need to be comfortable and trust them,” he says.
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This article was written by Tom Moor, Angie’s List.