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College Planning
Ted BraunAugust 4, 2016
College Planning
What types of options do I have when it comes to saving for my children’s college education, which is best and why?
While the cost of college continues to increase at a torrid pace, there are ways to prepare for one of the biggest expenditures in your lifetime. With appropriate planning, disciplined savings and thoughtful conversations with your child you can significantly improve your chances for success.
Power of Starting Early & Saving Often
Just as the case with any savings goal, the sooner you start and the more disciplined your approach to saving the better off you are. The power of compounding cannot be overstated when looking at an 18 year time horizon. As an example we’ve created the table below to highlight the power of compounding and the difference in total savings when someone starts saving $1,000, $500 or $250 a month at the birth of their child vs. their 5th birthday using a tax-deferred vehicle.
| Savings Amount | Savings Beginning at Child’s Birth | Savings Beginning on Child’s 5th Birthday | Difference in Final Account Balance |
| $1,000 per month | $349,345.16 | $219,171.86 | + $130,173.30 |
| $500 per month | $174,672.58 | $109,585.93 | + $65,086.65 |
| $250 per month | $87,336.29 | $54,792.97 | + $35,543.32 |
Assuming a 5% annual return you could have approximately $130,000 more in savings when the child turns 18, while only contributing $60,000 extra dollars by starting at birth vs. age 5 (when saving $1,000 per month). As you can see, before worrying about the actual cost or which school your child will attend, the most important action you can take is to simply begin saving sooner than later.
Impact of Inflation on the Cost of Education
Just as the power of compounding can dramatically affect the amount of your savings, so too can inflation affect the cost of a college education. Recent research suggests that college tuition could continue to increase anywhere between 6% – 7% over the next several years. This is nearly three times the current rate of inflation for the majority of consumer products and services.
Using our Financial Planning software “NaviPlan”, we have created the table below to highlight the dramatic impact inflation can have on the cost of secondary education over the next 18 years. Using current tuition figures (room & board included) for a PA resident and a 6% rate of inflation, we were able to highlight the projected cost for the following four well-known schools at different cost levels.
| School | Current Annual Cost | Projected Cost in 18 Years |
| West Chester University | $17,589 | $219,627 |
| Penn State University | $28,434 | $355,045 |
| Ohio State University | $39,031 | $487,366 |
| University of Pennsylvania | $63,526 | $793,226 |
Our intent is not to frighten or discourage existing or future parents of children planning to go to college, but rather to highlight the importance of planning ahead for what could be a large expense for you and your family. As your child matures and begins thinking about what college they would to attend, what career they want to pursue, it is absolutely critical that you involve them in the financial requirements to obtain a college education. We recommend that you discuss with them the costs and the impact that large amounts of student debt can have on their ability to purchase their first home or start their own retirement savings. It is not easy to have these conversations, or for a teenager to have the foresight to look past the fun, excitement, and in most cases life-changing experiences involved in attending college, but HFA can help!
As you begin having conversations with your children, contact HFA for some help. Sometimes words can be difficult to fully comprehend for a teenager but when there is objective data, interactive charts and real numbers in front of them, it can sometimes be easier for them to see what kind of long-term impact college decisions can have.
Savings Vehicles
After making the decision to start saving, the next decision point is what type of account and or investment vehicle best suits your needs and goals. While there are several vehicles that can be used to save for college expenses, we have narrowed that list to what we believe are the following best options.
529 College Savings Plans
By far the most widely used vehicle for college savings are the 529 plans which are named after the section of the Internal Revenue Code that authorizes such plans. These plans are established by various state governments. With a lengthy list of “pros” and only a few “cons” related to using this type of vehicle it is an attractive option for most parents, grandparents and other relatives. Let’s start by taking a look at some of the “pros” making this one of the better savings options:
On the other side of things, some of the limited cons to utilizing a 529 College Savings Plan are:
In our opinion, the benefits to using a 529 College Savings Plan to prepare for college expenses far outweigh the cons. When working with our clients on their comprehensive financial plan, 529 College Savings Plans are often are primary recommendation when discussing education planning. While we believe strongly in the positive impact of a 529 College Savings Plan, it is important to understand that there are other ways to save. Below is another table that provides some high-level details of those options.
| Type of Account | Contribution Limits | Income Limits | Special Tax Treatment |
| Education Savings Account (ESA) | Yes; $2,000 per year | Yes; married with income >$110,000 are ineligible | Yes; if used for qualified education expenses |
| UTMA / UGMA | None | None | None |
| Brokerage Account | None | None | None |
Conclusion
Balancing the cost of raising a family, saving for your own retirement and saving for your children’s college education can be daunting tasks, but all of these should be considered. We would never suggest that you completely eliminate contributions to your own 401K or IRA to fund college savings. Instead, we attempt to build a plan in which we focus on the best and most efficient way to allocate your savings over the years. While it is a challenge to address all you savings goals, having a sound financial plan, a disciplined savings habit and a trusted partner in HFA helps to give your family the best chance for success.
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