In 2012, college students pay for a year on campus what their parents paid for an entire four-year degree. The infant you hold in your arms today may pay six-digit annual tuition when he or she matriculates eighteen years from now. Obviously, you must begin planning and saving before the next diaper change; and if it all seems more than a little overwhelming, take five tips from parents with children in college right now:
1. Contribute to college daily. The strict rules of domestic budgeting demand you make yourself your first creditor. Following those rules in a difficult economy, you must look for extra college savings in tiny, painless, productive little economies. Instead of buying coffee on the way to work, brew it at home; savings translate to $30 per month in the college fund. Realize similar savings from “brown-bagging it,” banking approximately $90 per month in the college fund. If you count-up and cut your little extravagances, periodically investing your savings, you will buy at least a semester’s expenses. As you economize, reprise an old favorite savings technique: At the end of each day, empty the change from your pockets into a five-gallon plastic water bottle. Filled, the bottle will contain a surprising four-digit sum, enough to invest in a certificate of deposit.
2. The Feds will help. Experienced college financiers advise tax-deferred Educational Savings Accounts—“ESAs,” also known by the IRS designation “529 accounts.” Just as you contribute to your individual retirement account, reducing your income taxes and providing for life after work, so you may contribute to a 529 account, providing for life after high school. Realize income tax reductions now, and pay for college later. The veterans warn, however, ESAs come with two caveats: First, because 529 savings can be used only for college expenses, financial aid officials count ESA assets they calculate students’ needs-based awards. Therefore, you stand to lose some of your benefits to reduced financial aid offers. The veterans counsel simply “Do not overload your 529.” Second, because you cannot contribute more than $2000 per year to a 529, and because interest rates remain low, you should not count on your ESA as the sole source of college funding. If you invest for the next eighteen years at current rates, and if college costs continue increasing at current rates, your ESA will buy one year at a median-priced college.
3. Bank summer earnings and wages from part-time jobs. Be prepared for some aggressive parenting as a part of this savings strategy, because your college-bound child-and-heir, oriented to immediate gratification, will want to spend his or her hard-earned paycheck on the whim du jour. As always, you have the choice between “tough love,” insisting all of it go into savings, or a negotiated settlement that satisfies your long-term forecasts and your teenager’s right-now needs. You may also be prepared for difficult choices between a growing teen’s immediate need for cash and the imminent demands of college. Juniors and seniors need car insurance, sports gear, prom-wear, graduation pictures and other high school memorabilia. College-wise parents agree you may divert some money from college savings, but you never-ever should withdraw money from college accounts—especially because you risk interest and tax penalties if you liquidate any of those assets for anything but educational expenses.
4. Make college part of every great occasion. A contribution to the college fund makes a great stocking stuffer, birthday gift, Easter-egg filler, Groundhog Day observance, and patriotic salute to the troops on Memorial and Veterans’ Days. Acting under the influence of teen-age enthusiasm and peer-pressure among the soccer moms, parents sometimes splurge on sweet sixteen extravaganzas. Resist the temptation, and stand strong against the pressure. For the price of one big party, your college-bound scholar can pay two months of room and board in the dorms. Urge the extended family to contribute to the college fund on big occasions, too. Grandma and Grandpa are good for the money.
5. Buy and hold. You do not want to risk Berkeley on mortgage-backed securities, but you do want to maximize the return on your college savings. Work with a trustworthy financial adviser to select a moderate-risk mutual fund or a dependable indexed annuity, stressing the need for steady returns over the long haul. Some parents advise seizing the “teachable moment.” Track a few stocks with your child, and then challenge him or her to pick one, putting-up the money for the investment. Hold the investment for a year, and then compare your child’s earnings with your own investments’ returns. Adjust investments as needed.
Not only as a principle of sound family fiscal policy but also as a rule of wise parenting, make college savings a collaborative enterprise. Your child should grow-up expecting to attend college, because the expectation strongly influences the outcome; but your child should also grow up understanding that he or she earns the privilege of college attendance. Your child contributes to the collaboration by earning good grades and saving money; you contribute with affirmation and investment. At graduation, you congratulate one another for excellent work.
Guest writer Mary Baxter is a writer and student, working toward an online master degree in nursing.