Saving for College

According to a 2011 report by the Census Bureau, a college graduate can earn over 80% more during his or her lifetime than someone with just a high school diploma. But that advantage comes with a price tag. Currently, the annual cost of a four year private college can top $30,000 for tuition, fees, and room and board, according to a 2013 report by the College Board. A sound college savings and investment strategy can help put your children (or grandchildren) on the road to a valuable four year college degree.

Saving-For-College-466x372When saving for college, or any large financial objective, it’s best to start early and invest often. First, set your goal by estimating how much you will need to accumulate for each child based on his or her age. Then, develop a plan and stick with it.

If you have time on your side (12 to 18 years), consider investing the majority of your college assets in stocks and equity mutual funds, as these investments have historically provided the greatest long-term growth potential (of course, past performance can’t guarantee future results). Naturally you should consider the volatility involved with equity investing and your ability to ride out potential fluctuations.

As college matriculation nears, you’ll probably want to add or increase a fixed-income element to help balance risk. Also, consider teaching the college bound student about investing by encouraging that a portion of the money earned through part-time jobs be contributed to their college savings plan.

There are several options to consider when investing for college, though our favorite vehicles are 529 college savings plans. These state-sponsored plans allow individuals to invest in predetermined, professionally managed investment pools. All earnings and distributions are tax free if used for qualified higher education expenses. Plus, residents in some states (not California) may be eligible for a state tax deduction on contributions to that state’s 529 plan.

Lifetime contribution limits to 529 college savings plans often exceed $200,000. In addition, each parent or grandparent can contribute up to $14,000 annually or make a lump sum contribution of $70,000 every five years (up to the plan’s lifetime contribution limit) without triggering gift taxes. There are also no income restrictions, so anyone can contribute to a 529 plan.

529 plans vary widely, with some states offering plans sold through brokers like Smith Barney or Merrill Lynch. These plans often come with up front sales charges and may include ongoing account servicing fees for the broker, too. Other states (including California) offer plans directly to individual investors, often with much lower costs.

Any savings will also affect a child’s eligibility for financial aid, so when saving for college it’s important to develop a strategy which takes this into consideration. Assets of a child, such as custodial (CUTMA) accounts are weighted more heavily against financial need than are assets of the parents. Grandparents’ assets (including 529 college savings plans that benefit the child) are not considered until a distribution is actually made.

Saving for college enables a student to graduate with minimal debt, giving that student a leg up on their own financial success. You can learn more about these plans at www.savingforcollege.com, or by scheduling an appointment with us.

About Rick Brooks

Rick Brooks, CFA®, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Investment Officer. He is a lead advisor, counseling clients on all aspects of personal financial management. Rick serves on several boards. He is the Chairman of the Board of Girl Scouts San Diego, and also chairs the San Diego Foundation’s Professional Advisor Council. Rick and his family live in Mission Hills. Rick enjoys spending time with his family, theater, cooking, skiing, gaming and reading.

Leave a Reply

Your email address will not be published. Required fields are marked *