Have you been to this party in Kansas City yet?--“Just picking up Junior’s school supplies tears a ragged, bleeding hole in my budget. How am I ever going to send him to college?” says a guest. Someone will answer, “I’m not saving money for college. Not a dime! Every buck you save cuts down your financial aid!” The guy at the chip bowl will make the point that gives every parent pause: “Save for retirement, not for college. Your kids can borrow money for their educations, but no one will float you a loan in your old age.”
Financial Advisor Greg Dosmann shoots down this conventional wisdom. “There’s a new paradigm,” he says. “Earlier generations of parents married younger and put their kids through college long before they reached retirement age. College and retirement were separate issues. Nowadays, kids’ college expenses and parents’ retirement happen close together, or even at the same time. They are the same issue: a big expense.”
The cost of college has risen 6-9 percent annually for the last decade or more. Retirement expenses, on the other hand, increase only 2-3 percent per year. College is likely to be more expensive than you expect, and the last thing you want to do is raid your retirement account to pay for it.
Many experts recommend saving 15 percent of your income for retirement. Dosmann concurs. He also suggests that parents set aside 2-3 percent for college, beginning when the child is an infant. For those who can’t afford to save 17-18 percent, Dosmann cautions against chucking the college savings account. “Drop the retirement savings to 12 percent,” he suggests, “and keep putting away that 3 percent for college.”
What about financial aid? Many parents harbor dreams of scholarships, grants and other kinds of free money to pay for college. In reality, most financial aid comes in the form of loans. Do you want your kids to be saddled with tens of thousands of dollars in debt as they begin their working lives? Dossman also notes the effect of the weak economy on lenders. “The pool of lenders for student loans is shrinking,” he says. Parents cannot assume they will be able to borrow all they need.
For college savings, look for a 529 plan. Offered by every state, these accounts come in two forms: pre-paid tuition plans and tax-advantaged savings accounts.
Dosmann is not a fan of pre-paid tuition plans. “They have a lot of tentacles,” he says. Plans may require students to attend in-state colleges, for example. And some are in financial trouble. “Pre-paid tuition plans are ‘implied obligations’ of the state,” Dosmann says. “If they go under, the state doesn’t have to bail them out.”
The 529 savings plans offer a significant tax break. Your money grows tax free, and even when you withdraw funds to pay college expenses, you don’t have to pay tax on the earnings. You can open a 529 account in any state you choose, but Dosmann says that there are often extra tax benefits to be reaped by using your own state’s plan.
Whichever savings plan you choose, consistency is the key. “If parents set money aside every month from the time the baby is born, they will be in good shape at college time,” Dosmann says. His favorite place to scrape up some extra bucks for the college fund? Soda. “Think about it,” he says. “You order a soda in a restaurant and that’s two bucks, maybe two-fifty. Drink water and put that money in the bank. If you eat out a few times a week, it adds up fast.”
You can find a wealth of information about saving money for college on the web. Check these sites:
- www.SavingForCollege.com This useful site offers details, ratings and comparisons of the 529 plans in every state.
- www.529s.com All about 529 plans.
- www.FinAid.org A comprehensive guide to college financial aid.