It’s back-to-school time across the United States. From kindergarten to college, parents are dropping their kids off at the doors of academic institutions with the goal of helping them create a bright future. As the parent of three children, our kids are starting the 2014-15 educational journey as well. I recently dropped my son, Sheldon off at UW-Madison for the start of his junior year, while my daughter Callie is hoping to be a Badger next year when she starts her freshman year. Thankfully, my youngest daughter, Ava is just entering 4K so we have a bit of time before she needs to make college plans.
According to a 2013 report by the College Board, the annual cost of a four-year college can top $30,000 for tuition, fees, and room and board. The growing cost of a college education never ceases to amaze me. While Sheldon and Callie’s college expenses will be covered by a mix of college savings plans and financial aid, we are hoping to have most of Ava’s expenses covered well before she reaches the hallowed halls of academia.
Because this is our third time around, we have been a bit smarter about Ava’s college savings plan – We started early! Our first step was to discuss our hopes, fears and goals for Ava’s college years with our advisor at Financial Fiduciaries. Based on our needs they provided us a great deal of valuable information.
The first suggestion our advisor made was to invest a substantial amount of college assets in stocks and equity mutual funds while Ava is still young. The thought behind this suggestion is that these tools have a history of providing the best long-term growth. However, it is important to remember that past performance is not a clear indicator of future growth. (This is one reason I am so glad to be working with the Financial Fiduciaries team…they will keep me apprised of any problems and help me make adjustments as needed.)
As Ava gets older, we will increase our contributions to fixed-income options such as a 529 savings plan. These tools are among the most popular college savings instruments because they allow individuals to invest in predetermined, professionally managed investments that are tax-free if used for qualified higher education expenses. Additionally, residents in some states may be eligible for a state deduction.
While each plan has their own specifications, in general, lifetime contribution limits can often exceed $200,000. In addition, my wife Lisa and I as well as my parents can each contribute up to $14,000 annually or make a lump sum contribution of $70,000 every five years. There are also no income restrictions, so anyone can contribute to a 529 plan.
Finally, it is important to remember that any savings toward college will affect your child’s eligibility for financial aid (we found this out the hard way with Sheldon). Because of this, we are working very closely with our advisor to develop a strategy that takes this into consideration.
College is an expensive venture for students and parents alike. But, putting a solid plan in place well in advance of the college years can give you the peace of mind needed to face this unique transition with ease.