Most parents may not realize that when it comes to saving for college, you have multiple college saving options available to you and your family. But whether you are the parents of multiples (twins, trips, quads, etc.) or have multiple kids, how do you determine what the best college savings plan option is best for you?
First, let us begin with identifying what the five college saving plan options are:
At first glance, it appears as though a prepaid 529 plan could be the best option given that they provide assurances that your investment will keep up with the rate of college tuition inflation while mitigating the market risk. However, you are a few crucial facts that you need to know:
The chart compares a conventional 529 with a prepaid 529 plan. There are currently eight states that offer a prepaid 529 option which are:
There is also a Private College 529 Plan that allows families to lock in tuition at nearly 300 participating private universities and colleges. It is the only prepaid 529 that can lock in tuition at private universities. The plan is sponsored by the Tuition Plan Consortium LLC, which is composed of participating schools. The Tuition Plan Consortium guarantees the locked-in tuition price, meaning a participating school is obligated to accept purchased plan certificates even if that school later leaves the program. Beneficiaries have up to 30 years to use the plan’s benefits.
If you are considering investing in a prepaid 529 plan, consider utilizing a checklist that I developed to help you analyze the plan. There are several crucial elements both financially, and personally, that would factor in making your decision to invest in a prepaid 529 plan.
If you decide that a prepaid 529 plan is best for you, you are betting that…
While locking in the cost of tuition sounds appealing, let’s look at the trend in the cost of college in the chart below.
Notice a trend over the past 15 years? While the absolute cost of college has increased, the rate of the increase has been slowing. Some schools are even seeing a decline in the cost of tuition. As U.S. birth rates continue to decline, this means a shrinking pool of applicants for colleges. Sooner or later, the laws of supply and demand should kick in, thus bring down the cost of tuition.
Next, let’s address the Coverdell Education Savings, UGMA/UTMA, and Roth IRA options as a group. The upside of these three options all pales in comparison to the benefits of a conventional 529 plan. However, there are significant drawbacks to these three options which are as follows;
When it comes down to it, here are the reasons why I believe that a conventional 529 plan is the best option for most families to save for college:
For an in-depth summary of all five college saving plan options, I created a side by side comparison here
Parents often ask me what the impact on financial aid would be in utilizing a conventional 529 plan. Unfortunately, most parents believe that it will negatively impact them, which is wrong.
If the parent is the account owner, accounts are treated as assets of the parent, which has a smaller impact on federal financial aid than if the assets were those of the child. The current federal financial aid formula considers no more than 5.6 percent of parents’ assets and 20 percent of a child’s assets available to pay for college.
Individual institutions may consider parents’ assets differently when deciding how to distribute financial aid. Be sure to consult the college or university financial aid office and your wealth advisor about your situation.
Practically, any type of saving for college could impact your federal financial aid; it should not deter you from deciding to save and invest. Another point that parents of multiples or multiple children should consider is that the more kids you have in college at one time, the lower your Expected Family Contribution (EFC). The more kids you have in college at any point in time is one of the most significant impacts on your federal financial aid.
My wife Theresa and I have a set of triplets and another daughter who is 22 months apart. We started our youngest in preschool early, which meant that she had not one, but two years of preschool.
She was always trying hard to keep pace with her older set of triplet siblings. We felt that she was mature enough and ready to handle kindergarten as an early 5-year-old.
Knowing how the current Expected Family Contribution (EFC) calculation works for college financial aid did play a small role in our decision to let her begin kindergarten early. During a four-year college timespan, I will have three kids in college the first year, four the second, four the third, and only one in the fourth year.
We set up 529 plans for each of our kids shortly after they were born. Although we knew that we would not be able to contribute a lot, I knew that something was better than nothing at age zero. I also knew that with the flexibility of the conventional 529 plan, anyone could contribute to it. I strongly encouraged family and friends to consider making contributions for holidays and birthdays to the plan instead of toys or clothing that they would quickly outgrow.
During the early years, family and friends were contributing more than Theresa, and I was. Diapers and formula for triplets were not cheap. Today, college contributions are part of our overall wealth management plan. However, we still don’t anticipate that we will be able to cover the entire cost of college, and that is okay with us. We know that we must balance other financial priorities, but we also know that we are still helping our kids in some way.
As I noted in my own story, getting started early and letting compounding work for you and not against you should be your first step.
Having conversations with your spouse/partner about how much you can or what to save should be your next step. I work with many families where one spouse/partner wants to pay the entire cost of college while the other does not. I help people find common ground on this issue while taking into consideration the other multiple financial priorities that are likely tugging at you.
If you have kids who are already in middle school or even high school, start having conversations about college with them now! Setting expectations with your kids as early as possible about how college costs will be covered or shared is vital. I can’t emphasize this enough. The last thing that you want is for your kid to get into an Ivy League school only to determine that you can’t afford to pay for it.
If you have questions about college planning or any wealth planning topic, including portfolio management and tax planning, schedule a time below to see how I may be able to help you prepare for college as well as other financial and lifestyle goals.