Posted: September 24, 2013
Five great tips to fund college
Know the numbersMeg Armstrong
It’s no secret that college tuition prices have steadily risen over the past few years. According to the College Board, over the last 20 years, the actual price of a year at a private college, including tuition, fees, room and board, has risen at an annual average of 1.6 percent on top of inflation and 2.3 percent for a four-year public university.
As these costs continue to escalate, many parents are left wondering how they can most effectively plan for their children’s education. Creating a strategic plan with specific goals, timelines and communication elements provides the necessary framework to help individuals prepare for this important milestone.
Know the Numbers
Start from the beginning. Parents should begin the process by understanding what the expected tuition costs will be when funds are needed. While there is no crystal ball to predict exactly what these costs will amount to by the child’s graduation, modeling tools have become quite sophisticated and can provide strong estimates. A financial advisor can help project costs based on your child’s age, current tuition prices and expected inflation rates.
Determine How Much to Fund
After a figure has been established, parents need to determine how much of the estimated cost they would like to fund. This is very personal and varies greatly from person to person, sometimes even within the same couple. When discussing this issue, it may come to light that one parent had their entire education funded and wants to do the same for their children while the other parent may have paid for a portion of their education and expects their kids to do so as well. Uncovering these different viewpoints and having an open discussion in order to come to an agreement that makes both people comfortable is critical.
Establish Investing Timetable
Once an agreement has been reached, the next step is to put this financial goal in writing and begin weighing options to successfully achieve the required savings. First, designate monthly or annual contributions to your preferred education savings vehicles. Parents should understand that allocations might change over time, depending on expenses and income. They should not become discouraged if projected savings do not align perfectly with the end goal as adjustments will more than likely need to be made throughout the savings cycle. The most important item is to consistently save to ensure the funds continue to grow.
There are a variety of college savings vehicles available, including 529 Plans and Coverdell Education Savings Accounts. In addition, parents can establish general savings accounts either in their own names or by setting up UTMAs (Uniform Transfer to Minors Accounts) for their children. For larger gifts, gifts in trust may be used. In addition, certain education expenses may be paid directly to the educational institution without any limitation on amounts that may be given “gift tax free.” Financial advisors can provide recommendations on specific vehicles to ensure the deployed strategy is in line with the strategic plan.
Communicate the Strategy
Communicating these education and savings plans to the child is very important in setting reasonable expectations. When the time is right, parents should start the conversation with their child about the educational path the child envisions for their post-secondary education. Parents can help a child weigh their desires to attend a public or private university, in-state or out-of-state, and begin assessing how many degrees he or she may like to acquire. Talking about these topics is a logical way to begin discussions regarding personal goals and financial needs. Conversations should clearly outline the financial support the parents plan to provide toward their child’s educational needs, and where they expect the child to share responsibility. This will help the child begin establishing his or her own goals and promote accountability for educational expenses as well.
With the rising costs of education today, having a strategic and intentional plan is critical. Working with a financial advisor to create a formal strategy can help families prepare for this very important and meaningful gift.
Meg Armstrong is a vice president and wealth advisor for UMB's Investment and Wealth Management division in Denver. Meg may be contacted via email at email@example.com.