With the families I work with, a common early financial planning question I get is:
“Are we saving enough to put Junior through college?… is $50/month sufficient?”
It’s funny how common this question is, even down to the dollar amount.
My first question back to them is:
“Tell me about your college experience. Who paid for it? What do you think are your responsibilities?”
There are a variety of responses to this, but usually align with one of the following:
“I came out with debt, and I don’t want my kids to carry that burden.”
“My parents paid for (much of) my college, and I am super thankful.”
“I put myself through school, and the experience made me who I am … and I want that for my kids.”
Where do you fit on that spectrum? Do both partners agree?
My second question is, how old are your kids?
College usually is planned to start when they reach 18. So this number will determine the time frame for saving.
Then we get into a few subjective areas
The parents’ college education is indicative of their kid’s future college experience. If you went to an Ivy League college, and you have a MD/PhD, your kids are likely to follow a similar path. On the other hand, if you and your spouse got liberal arts degrees from a state school your kids will, in all likelihood, follow a different path than the MD/PhD kids.
This data will help me model the proper yearly college expenses.
Harvard current yearly expenses: $71,000
Harvard yearly expenses in 10 years: $127,000
Ga Tech current yearly price: $28,000
Ga Tech expenses in 10 years: $50,000
Find stats for your college here.
The last few subjective areas are: What is your current income (and capability to pay as you go) and are you “saver”.
At this point, we have the basics we need to start putting together a college savings plan.
The Basics for a College Savings Plan
Your thoughts on paying for college
Where you went to school and the type of degree = where your kid will likely go
How long until the bill is due
The approach to saving/paying for school
I typically advise clients to start with saving for two years worth of college expenses, and to think about using a standard in-state college tuition rate. There are a number of factors that have led me to this advice:
The kids may not go to college
They could get HOPE scholarship money
College could be free in the future
The kids may take an alternate route than their parents
You don’t want to have all of this money tied up in an account that makes it difficult to access
That gives you a number: (Ga Tech 10 years out *2) = ~$80-100k
After you have wrapped your head around that big number, its time to add the additional factors from your own situation.
Lets say that you want to plan for 2 years of a top tier private school: (Harvard 10 years out * 2) = ~$250k
As the kids get closer to high school graduation, the muddy picture of their college future will begin to clear up. As the picture becomes more clear, the next planning steps will also become more clear.
The investment vehicle for college savings
You want a 529. A married couple can add ~$30k/year. You add money after tax. However the growth of the account is not taxed, if withdrawals are made for college expenses. The state of GA offers a small tax break for using the GA 529 program. If you live in a state that does not offer a tax break (like FLA, since they don’t collect state taxes), the VA plan gets high marks. If you need any help setting up these accounts, I can help.
The accounts should be in YOUR NAME,
with your child as the beneficiary.
I also recommend forwarding deposit information to your parents and other family members. In years to come, your kids will appreciate their college being paid for, much more than Poe’s x-wing lego set.
Josh’s College Saving Recommendations:
Talk to your kids about this. They need to understand how much college costs.
Children need to understand the value of their degree and future job prospects.
Take them to college campus’ sooner than later … start when they are in middle school or freshmen. Don’t wait until they are seniors. The more colleges they see, the sooner kids will gain a better understanding of what they want from their college experience. And that means you will have a better picture of how much you should be saving for college.