How To Save For College

Q. How important is it for parents to save for their child's college education?

Ask 10 parents about their thoughts on saving for their child's college education and you will probably get 10 different answers. Those answers will range from, "My parents didn't help me through college, and it made me appreciate it even more — So I don't plan on helping my kids with the cost," to "I plan on paying for all of the costs, even if it means I have to go into debt to do it." While those are the two extremes, I think most parents fall somewhere in between.

Recent college graduates who took out student loans borrowed on average $30,000, which is up 26% compared to 10 years ago. If parents are looking to keep their children from starting behind the proverbial eight ball with a pile of student debt at graduation, saving for their education is critical.

Q. When should parents start saving?

Parents should start saving for their children's education as soon as possible. The most valuable asset when it comes to long-term investing is time. Time allows investors to capitalize on compounded interest. For example, if you invest $200 per month from the time your child is born until the day they turn 18, you will have accumulated nearly $78,000 (assuming a 6% rate of return). Comparatively, if you begin investing $400 monthly beginning when your child is 10 years old, using that same 6% growth rate, you will have amassed about $49,000. Don't take a "wait and see" attitude when it comes to savings.

Q. What goals should parents have?

Parents should set realistic goals when it comes to savings for their children's education. As an advisor, I have seen families place too much of an emphasis on education savings while sacrificing their own retirement savings (you can borrow for college, but not for retirement). I've also seen the opposite end of the spectrum where parents have analysis paralysis and don't save at all because there are so many savings options and so many variables when it comes to how much college will cost in the future.

Instead of focusing on the unknowns of the future, like if the child will go to state school or private or if the child will receive a scholarship, I help my clients save for college using the knowns of today. We know that 529 plans provide a great savings tool for tax-deferred savings, tax-free distributions (when used for qualified expenses), and even state tax deductions (depending on your state). We know that saving earlier is more advantageous than starting later. We also know that while it would be nice to pay for all of a child's education, it isn't a requirement. With those facts in mind, I am able to help clients create an education savings plan that meets their goals in the context of their entire financial picture.

There is obviously no one-size-fits-all financial answer for savings goals. However, there are two goals that all parents should prioritize. The first goal should be to at least have a plan. If they need help with that plan, that is where a comprehensive financial advisor comes into play. The second goal would be to start saving as early as possible on a systematic basis. If you are worried about not knowing what to invest in, many state-sponsored 529 plans make the investment decision easy by grouping investment options based on the amount of risk you are willing to take or by the age of the child.

Q. What pushed you to make the savings decisions you've made for your children?

The statistics are shocking when looking at the difference in earned income between graduates of high school and college or trade school graduates. I want my children to have every opportunity to obtain as much schooling as they want and need to live productive and enjoyable lives. While I know that my wife and I might not be able to pay for all their education, I know every little bit helps.

As an advisor, I see clients who have mountains of student debt and feel overwhelmed to pay it off. While most do not regret taking on debt for their education, most want to be in a position to help their children avoid the same fate.

Q. Do you have any advice for parents who aren't sure how they can afford to save?

My best piece of advice is if you are unsure about your savings situation, talk to someone who has experience and expertise on the topic. I have recommended to clients that they should focus on their own retirement savings before their children's education unless they want to be working well into their 70s. While the conversation may be difficult, having someone tell you what you need to hear over what you want to hear should be beneficial in the long run.

The other piece of advice is to make saving a priority. There is nothing wrong with living in a nice house or driving a nice car, but realize they come with tradeoffs. Extravagant vacations or "keeping up with the Jones'" might not be the best use of your assets.