Saving for college
by Milad Taghehchian, CFP(R) on December 17th, 2010

One of the greatest feelings we have as a financial planners is when our plans come to fruition. Over the last few years, we have seen several of our clients reach the dream of seeing their kids enter and exit college. Planning for college expenses can seem like a daunting task but like any other challenge facing it dead on is much better than sweeping it under the rug. So lets face it dead on here.
  • 1. Figure out how much college will cost your kids.

The place to start is visiting the websites of some of the academic institutions you think your kids may attend and look at the anticipated costs for tuition, fees, room and board. I know trying to decide where the kid will go to college when its still hasnt learned to walk is a tough prospect, but make some generalizations.

Once you have an idea of what it may cost today. Visit some of the great calculators on the web to help you get an idea of what it may cost when your kid is ready to take his/her first college course. Here are some of the calculators we like. If they ask for the anticipated inflation rate for college expenses, make sure you set that to at least 5%

  • 2. Decide how much you want to save.

Do not feel overwhelmed after step 1. Understand that paying for college expenses involves working, loans, grants, scholarships, along with savings. Remember rule #1 is save for your own retirement first, and then for college expenses. You can obtain loans, grants, and scholarships to fund college expenses, but there are no loans to retire. After understanding your retirement savings and fully funding it, take an account of your budgets to determine what you are willing to save toward college.

  • 3. Decide where you are going to save your money.

529 plans generally are the best place to start saving money for college expenses. You invest after tax dollars into this type of account, but all your gains and interest earned will be tax free as long as they are used toward qualified education expenses.

The only negative about 529 plans is that it has to be used for education purposes or there are penalties attached. The penalties are 1) you will have to pay taxes on the gains that were previously growing tax free in the account and 2) there is a 10% IRS penalty on anything that is taken out that is not for education purposes.

There are many different places that offer 529 plan. These days it seems that every mutual fund and insurance company has some sort of plan that they offer. As with other investments, minimizing your cost is step number 1 in determining which 529 provider you will want to choose. Our favorites are listed here.

Utah Educational Savings Plan Trust
College Savings Iowa
New York's College Savings Program - Direct SoldV
Vanguard 529

  • Finally, I know the baby clothes are cute (especially those little shoes) but try to pass up on some of the fun stuff for some of the long term benefit of your kids.

Posted in Investments, College Education    Tagged with college savings, 529, vanguard, financial aid, calculators, education


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