A proverb says, the best time to plant a tree was 20 years ago; the second best time is now.
The same is true when preparing to pay for your child’s college education.
Richard Blackwell, senior vice president and financial advisor with The Lewis Group, BB&T Scott & Stringfellow, says it’s never too late to start saving. “No matter how old your children are, you can start with a monthly budget,” he says. “That can have an impact.”
And, he notes, the habit of a monthly savings plan is useful before college starts, because it helps people adjust to a budget. “People think about the start date,” he says, “but on Day One, there are still four years of college to pay for.”
Taking the First Step
New parents might feel understandably overwhelmed by many aspects of caring for a baby. But that’s the time to plan for your little one’s higher education – if that’s what the goal is.
Mark Newfield, wealth management advisor with Newfield Financial Solutions, a Northwestern Mutual affiliate, says parents have to start at the beginning: “What is the goal, and how much resource can you provide? What are your priorities?” he says he asks clients.
Newfield notes that in some families, parents want to pay the full cost of their children’s college education, no matter what or where the institution is. Other parents may want their children to contribute with money they have earned themselves, so they have “skin in the game,” so to speak. Some parents offer to pay for an in-state college, telling the child that he or she will bear the costs above that. Others will take out loans, or support their children in obtaining loans. Others want the child to be debt-free upon graduation.
For the family that wants to pay it all, Blackwell says a reasonable savings amount, starting when the child is born, would be $365 per month for an in-state, four-year college. He used an average current annual cost of $24,000 (roughly Virginia Commonwealth University’s current expense), an inflation rate of 3 percent, and a return rate of 6 percent annually, tax-free – which assumes the savings are invested in a fund qualified for educational expenses (typically referred to as a “529” account, because that’s the number in the U.S. Internal Revenue Code that allows for the tax-free status).
“By all historical measures, this is attainable,” he says, adding that a zero-interest-bearing savings account would require $650 a month. “If you don’t earn better than the inflation rate, you have to save more.”
Though these figures may seem daunting, Blackwell agrees the best approach starts with a conversation. “Sit down and talk with a licensed investment professional and look at a long-term, goals-based plan,” he says. “You’re going to prioritize your goals, and make sure they line up with your philosophical goals and what’s rational.”
Where to Save?
Both investment professionals agree that a 529 account is where to start saving for college, primarily because of the tax savings.
The Virginia529 program, which celebrated its 20th anniversary in 2016, is credited for its solid management and performance. Morningstar, an independent organization that assesses and rates investment programs of all types, in 2016 gave a gold rating to Invest529, the investment program offered by Virginia529 that’s managed by in-house investment professionals – one of only three in the nation to receive the gold star. CollegeAmerica, the other investment program from Virginia529, received a silver rating. (CollegeAmerica allows an account holder to work with his or her own investment professional to direct investments within the portfolio offered by American Funds, a national mutual fund entity.)
Virginia529 CEO Mary Morris says Virginia529’s success stems from its focus on the qualities that Morningstar looks for in investments: process, people, parent, price and performance. “I think we do well on all those pillars,” she says.
Prepaid529 is different from other savings plans in that parents sign a contract and are actually purchasing semesters in advance for their children’s college education. Using the calculator on Virginia529’s website, a parent can enter the child’s age, select the number of semesters, and get a dollar figure. A parent wishing to purchase eight semesters of college for a child who was 3 as of Oct. 1, 2016, would pay $605 per month. For a newborn (born Oct. 1, 2016, or later) the cost drops to $524 per month.
Morris agrees the monthly cost can be challenging: “It’s one of the reasons we offer different types of programs,” she says, noting that parents can decide how many semesters they wish to purchase and set their own timeline. For example, in 24 months, a parent could purchase one semester for a newborn with a $376 monthly payment. Others can participate, too: If each set of grandparents pays for just one semester of the child’s education, then four semesters arecovered. “All of a sudden, it feels much more do-able,”Morris says.
Morris agrees that whatever the approach, it’s better to get started sooner rather than later. “Focus on what you can do,” she says. “It’s a message to your kids: ‘We believe in you and have this goal for you.’”
And Then...
Eventually, your child reaches high school.
Northwestern Mutual’s Newfield says parents have to be up-front with their children about what their options are. “Earlier is better,” he says. “People wait too long to tell their children what their family’s situation is.”
In Newfield’s case, he and his wife saved roughly $120,000, “enough to pay for any of our quality in-state institutions” at the time. It was simple: The couple saved $25 every week, starting in 1987, and increased their monthly set-asides as the years rolled by. “Start with a number and try to double it every year,” he says.
But then their son was accepted into the school of his dreams, a private college outside Virginia. And that’s where he went, even though the college fund covered only 22 months of his education, versus all of it. “I wanted to give him the choice I didn’t have,” Newfield says. “That was a choice I made, to let him go.”
Henrico couple Patrick and Ashley Horrigan already have Prepaid529 accounts for their two children, ages 3 and 1. Patrick says he wanted to address the college issue head-on. “I knew it was going to be a bill I have to pay eventually,” he says. “It’s another monthly payment.”
Patrick knows his family is lucky that his job in information technology supports the prepaid option, which for many families equals the cost of a second mortgage. He says the children can take on their graduate school costs themselves. “There are benefits to paying off a loan,” he notes.
The Lewis Group’s Blackwell says the ultimate goal is financial security. “We want what’s best for our clients – the parents – to be healthy in retirement,” he says, noting that parents can’t lose sight of their own financial well-being as they consider what to do for their child’s college education. “It’s like the instruction when you fly,” he says. “Put your mask on first, then help others.”
“If I were the student,” he says, “I’d rather take on loans than have to support my parents in their retirement.”
