Overwhelming but it can be done: Saving for college
As a Certified Financial Planner, it makes sense that BBVA Compass Investment Solutions Executive Director Lorin McMurray would run the gamut when it came to saving for his children’s college, having an investment in a prepaid plan from his home state, a 529 savings plan and a custodial account. Even still, he says, “College will cost you more than you ever thought.”
Indeed, the cost of higher education continues to increase, with some sources putting the increase at eight percent every year. With the average cost of tuition and fees - not including room and board - for the 2017/2018 school year at $34,740 at private colleges, $9,970 for in-state public colleges, and $25,620 for out-of-state residents attending public universities, projecting how much to save can feel overwhelming at best and downright terrifying at worst. McMurray’s advice is to start simple.
McMurray: Focus on getting two years of college funded in whatever savings vehicle you choose.
“Focus on getting two years of college funded in whatever savings vehicle you choose,” he says. “By doing this, you have a focused goal, you get a modicum of relief from the stress of saving for college and you have flexibility if your plan for your child gets derailed, like he or she decides college isn’t for them.”
McMurray also advises clients to begin saving for college early and often, even at the expense of padding retirement accounts. “Our retirement age is flexible, college start dates for your child are generally a fixed day in the future, so it’s smart to cover your bases early using college savings vehicles,” he says.
The college savings account McMurray most recommends to his clients is a state guaranteed tuition plan. While not all states offer these, McMurray says if your state does, it would be foolhardy not to participate.
“I love the word guaranteed because it means that no matter what happens with the future cost of college, your investment matches the covered expenses whenever your child starts college,” he said. “Of course, guaranteed tuition plans only cover qualified educational expenses, so plan on teaming that with a side fund.”
For a side fund, McMurray recommends a state-sponsored 529 college savings plan. Currently, investments in 529 plans are usually exempt from federal, state and local taxes. Contributions to a 529 plan may be tax deductible on your state income tax. Since state income tax benefits may be limited to the state’s own plan, you should consider investing in the state plan where you or your beneficiary lives.
McMurray: Researching the different plans, their tax implications and associated fees is an important step that shouldn’t be overlooked.
“State sponsored 529 plans are great, but they vary widely,” he said. “Researching the different plans, their tax implications and associated fees is an important step that shouldn’t be overlooked. If you need help, there are various resources available to assist you in your decision, such as a financial advisor or even a tax professional.”
Finally McMurray said, there are also Uniform Gift to Minors Act or Uniform Transfer to Minors Act accounts. These accounts allow family members to transfer assets to minors through the use of a custodial account. When the minor comes of age of majority, between ages 18-21, depending on your state, the account holdings are passed to them. McMurray says these accounts can be helpful, but that family members need to keep in mind that the child will have full access to the funds in the account at age of majority with no restrictions on how it can be used.
McMurray: Make it easier, by making a two year goal, investing in a state tuition plan if available, opening a fund that will operate as a side fund for expenses...and ... saving toward your goal.
“Short of an academic or athletic scholarship, there’s just no way around it - college is expensive,” he said. “So make it easier, by making a two year goal, investing in a state tuition plan if available, opening a fund that will operate as a side fund for expenses that aren’t covered by your state tuition plan or your primary fund if your state doesn’t offer one and keep saving toward your goal. It won’t be easy, but it’ll be worth it.”
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