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How I'm Paying for My Kids' College

Apr 05, 2019 | 6 min read | Aaron Task

Key Takeaways

  • Start saving for college as early in a child's life as possible.
  • 529 plans are still the best college savings option for most families.
  • Bring your child into the conversation about the costs of college.

 

My oldest child is a responsible, well-rounded kid: a solid student, varsity athlete, active in our community, and well-liked by classmates and teachers. A high school junior who turned 17 this fall, Davida also wants to go to college. I always assumed she'd go, but now it's getting real.

Planning for Davida's college education started shortly after she was born in October 2001, when her mother and I opened a 529 savings plan. I chose a 529 plan because the assets are not taxable while the account is growing, and all withdrawals are tax-free at the federal level when used for qualified education expenses.

Because of those tax advantages, 529 plans remain one of the best ways for families to save for a child's college education. However, a lot has changed since October 2001 — in the world obviously, but also in my personal life. I'm now almost 10-years divorced from Davida's mother, and I'm remarried with three additional children who will (probably) want to go to college someday too. I've changed jobs several times over the years, both voluntarily and otherwise.

 

Through it all, I've continued to invest in Davida's 529 plan and, more recently, opened new ones for her siblings. I did miss a few years of contributions, especially right after my divorce, but I've always recognized the value of long-term investing for her education.

The S&P 500 is up roughly 145% since Davida was born. Looking back, it didn't seem like a good time to be investing. It was just weeks after the 9/11 terror attacks, and corporate America was embroiled in a series of high-profile scandals and enduring an economic downturn following the dotcom bubble.

Yet the S&P 500 — and Davida's 529 account — survived and thrived those trials, in addition to the market's wicked decline during the Great Recession and the more recent turmoil over global trade tensions. That's the good news.

The bad news: College tuition never seems to have a bear market. The inflation-adjusted cost for four-year private colleges has roughly doubled over the last 20 years, and more than tripled for public institutions, according to a report from the College Board PDF opens in new window.

The annual cost to attend an elite private college in the current school year can be close to $60,000, including room, board, and tuition. The projected cost for a child born today to attend such a school is over half a million dollars, assuming 3% inflation.

Even the relative “bargain" of in-state college is now over $20,000 per year and projected to cost more than $140,000 in 18 years.

Those are staggering numbers for parents to consider, but the worst thing you can do is get paralyzed by fear or put off investing for a child's education “until things calm down." (Newsflash: They won't. Ever.)

 

 

 

According to James Mahaney, vice president, Strategic Initiatives at Prudential, “The most important actions parents can take to reach a college savings goal are to start early, automate regular contributions into a tax-preferred account...and adopt an appropriate investment strategy" that minimizes taxes while maximizing potential returns.

Based on Mahaney's advice, I'm doing pretty good (not great) when it comes to funding Davida's college. I did “start early" but didn't make regular contributions, automated or otherwise.

As for the third criteria, “an appropriate investment strategy," I think I'm doing it right, although it's hard to say with certainty. Fortunately, I can take concrete action now to improve my performance both before and during Davida's college experience.

 

Funding College: It's the Little Things

For the first 16 years, Davida's 529 was invested in an aggressive equity fund, based on the idea that time was on her side and we could afford to take more risks for the potential of a higher reward. That strategy proved wise based on her 529's performance despite some very rocky markets, as noted above.

In 2017, I converted Davida's 529 to an age-based fund which, like a target-date retirement fund, attempts to lock in gains and reduce the risk of loss as her high school graduation approaches. That switch cost us when the markets trended upward, but I felt it was an appropriate move given our timeline, and it proved prescient given the recent market instability.

For 2019 and beyond, I'm considering a stable value fund, which guarantees both principal and interest. With Davida's high school graduation so close, I want to get increasingly conservative with her 529 plan.

Here are four other things I'm doing now to (hopefully) increase what funds are available for Davida's education:

  • I'm reading The Princeton Review's How to Pay for College Opens in new window, which has been recommended by friends with kids who just started college.

  • I'm working closely with my wife and Davida's mother to make sure we're in sync on how we'll pay for college, apply for financial aid, tour colleges, and everything else associated with the process. We all seem to be on the same page however, we haven't always agreed on what's “best" for Davida, so I'm going to make sure we don't screw this up!

  • I'm reading the fine print: For example, up to 50% of withdrawals count as untaxed income for financial aid calculations if the assets are owned by a grandparent. Davida's maternal grandfather has annually contributed to a 529 account for her, and I want to make sure she gets the maximum benefit of his generosity, by either having those funds transferred to a plan owned by Davida or me, or saving those funds for the second half of her college tenure. "Withdrawals will count as untaxed income for the student in the year they are made," according to Mahaney. "Therefore, grandparents may wish to use those assets in the child's junior or senior year, at which point that income will not be factored into [financial] aid calculations," which are based on something called "prior-prior year" income.

  • I'm communicating clearly with Davida about what we can (and can't) do. My wife and I have told Davida that we've got a certain amount of money saved for her education. If she requires more, she'll have to come up with the difference via some combination of scholarships, work-study programs, crowdsourcing, or student loans (although my hope is she'll have little or no debt at graduation). If Davida decides her dream school is one far beyond our budget, she'll at least know her financial implications before making the decision to attend.

I recently saw an old friend whose daughter is now a college freshman. He recalled trying to steer his daughter away from the high-priced, out-of-state, private institution she's attending by breaking down the finances. It was to no avail: “The reality is you can't expect a teenager to make a rational decision about something that's so emotional like choosing a college," he said with a shrug.

I disagree. Kids today are smarter and more mature than prior generations, especially when it comes to the issue of college costs and student debt. At a minimum, it's worth trying to get them to see the cost-benefit analysis of one school over another — not to mention a gap year, community college, trade school, or other alternatives to traditional four-year college.

Whether the answer is "We can pay for whatever you want," "Sorry kid, you're on your own," or (like us) something in between, the onus is on the parents to clearly explain the financial realities to their child. Every kid and every situation is different, of course, but my recommendation is to start having those honest discussions sometime before the end of your child's sophomore year of high school.

 

Funding college: The next generation

For better or worse, Davida's college funds are fairly set at this point. Now, I'm turning my attention to her three siblings: my twin sons in kindergarten and 4-year-old daughter. As mentioned above, I've opened 529 plans for each of them, and they are positioned aggressively, as time is on my side in terms of their ability to withstand market fluctuations.

However, retirement is a bigger concern now compared to when I first became a father. Time waits for no one, to quote a less famous Rolling Stones lyric on the topic.

One tactic I'm discussing with my financial advisor is funding my youngest child's college savings via a Roth IRA. The big advantage being that “if the Roth assets are not used for a child's college education, they could be used instead for the parent's retirement," according to Mahaney.

In sum, hedging my bets and exploring myriad options feels like “an appropriate investment strategy" as I think about simultaneously funding my kids' education and retirement.

 

What you can do next

Review your college savings strategy to make sure you're on track, and have an honest conversation with your kids about what you can (and can't) afford. For more information on saving for college, download Winning the College Savings Race PDF opens in new window.

 

Aaron Task is former Editor-in-Chief of Yahoo Finance and Digital Editor of Fortune.

 

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