Money Talks: College Planning

I remember growing up in the 70’s whenever an adult asked, “what do you want to be when you grow up?” It was almost always the standard answer.  Girls were ballerinas and boys were either firemen or cowboys.  In our current society, where kids are on computers before they are out of diapers, if you ask that same question the answer that you may get is, “I want to be a doctor or a lawyer.” Proud parent moment! We go to work and we tell our peers how happy we are because Junior wants to be a doctor.  We start fantasizing about wearing a proud Stanford parent T-Shirt!  Well Junior does not fail.  The honor roll bumper stickers accumulate, the college brochures start pouring in and it finally comes, the big one, High school graduation.

Now Junior kept his end of the bargain, now it’s your turn and then it sets in, the sticker shock of the cost of going to college.  The reality is that college costs increase about twice as much as inflation with an average of about 5 to 8 percent.  According to the College Board’s numbers the average cost (tuition, fees, room and board) were $17,131 for students attending four-year public colleges and universities in state, $29,657 out of state, and $38,589 for four-year private colleges and universities.  Of course this in not counting books, supplies and that shiny new state of the art Apple notebook that all of the college kids must have.

No worries, you go into your special secret spot and pull out your shoe box marked college savings. You pull off the lid, blow off the dust and take a gander inside.  Hmmmm what do we see?  We have a card from grandma and grandpa that says, “happy 5th birthday my future Doctor” with a crisp 20 dollar bill inside.  We see a savings bank book with a whopping $62.26 in it collecting a .01% interest and the last deposit was 1994.  Oh wait, what is this?  Another piece of paper, it is a receipt for golf clubs and on it says, “IOU for college account”. Unfortunately while the details of the above story may vary many parents are facing the same ugly reality when it is time to send their children to college. 

The following tips are helpful when starting to plan for your child’s college future:

1. Find a plan that works for you

There are various options when determining a college saving plan, but the two most popular choices are College 529 plans and Coverdell Education Savings Accounts. 

College 529 Plans:  A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Even though your contributions are not deductible on your federal tax return, the investment grows tax free and the withdrawal for college cost is also federally tax free.  Anyone can set up a 529 plan for the child including parents and grandparents.  One of my personal pros of this type of plan is that the donor controls the account.  If Junior decides to run off and start a rock band he cannot take the money. Instead it can be transferred to another qualifying family member.  In the event that the money is needed it can be withdrawn with tax consequences and a ten percent penalty.  529 Plans are low maintenance and can be set up for as low as $250.00.

Coverdell Education Savings Accounts:  A Coverdell ESA is a savings plan that allows the donor to deposit $2000.00 per year towards education savings.  The tax benefits are similar to the above mentioned 529 as well as the penalties for early withdrawl.  So what are the differences?  A Coverdell ESA can contain various investment choices such as stocks, bonds and mutual funds, whereas a 529 plan is determined by the particular state plan. 529 plans do not have an age limit but Coverdells must be distributed or transferred by age 30. Lastly 529 plans are limited to college/university expenses but a Coverdell account can be used for any qualified educational institution including elementary schools.

2. Start Early on College Savings

It is very important to find a plan and start the process early.  As little as $25 or
$50 a month can help accumulate a nice size college savings.  As a child gets closer to college entry, the investment strategies change and the suitability now changes to a more safe investment which also can mean less growth.

3. It Is Never Too Late

One of the most common things I hear from parents when discussing college planning is that their child is too old, they are in 6th grade and they wished they started thinking about this when the child was a baby. While it is true that your savings might not pay for all four years, even by starting later in the child’s education ladder you can help pre pay the massive cost that will soon come down the road. 

4. Find a Professional to Help

Do you remember the first time that you
thought you could easily fix that broken pipe in the bathroom, only to have a
gusher shooting up to the ceiling?  As you are cursing and wading through water the thought comes out that you should have hired a professional.  The same
holds true for college planning.  By contacting a financial advisor, they can look over your current financial situation and go over the pros and cons of each type of option available.  The similarities of the plans are many but the plan differences are the ones that need to be discussed.  Many advisors including myself often sit down and go over the numbers for various scenarios without any obligation to open an account.  Contact one today.

By following the above tips rest assured that Junior's college adventure will not be as horrific as it seems and those golf clubs that were bought will not have to be sold on ebay.

If you would like to discuss the options available or have further questions please contact me David Godinez at 510-552-4334 or email me at dgodinez@oaktreesecurities.net