With the average student loan borrower graduating with $34,000 in debt—up 70 percent from just a decade ago, and student loan delinquency at the highest rate of all types of household debt, it’s no wonder this issue appears regularly in the headlines these days. Making things worse is the runaway cost of college, which, even adjusted for inflation, has risen 350 percent since 1973, while median family income has remained unchanged. More than ever before, parents and grandparents are looking at ways they can help future students by saving for college early in the child’s life. We asked Regina Jaeger, vice president and trust officer with Greenleaf Trust, to map out some basic advice for those considering forming a college fund.
1. I know every advisor says this, but it’s true and is actually the most important of all: start as early as you can. You have more time to make even modest contributions accumulate and the power of interest and growth increase the value of your savings. It’s never too early to begin, but know that to create an official college fund, you will need a social security number for the child, so you may want to consider other savings options (like a Roth IRA) if the child is not yet born.
2. Consider a 529 plan. Named after section 529 of the Internal Revenue Code, the plan allows investments to grow free of federal and state income tax when used for qualifying higher education expenses at withdrawal. The contributions are not federal-tax deductible but some states offer tax deductions for contributions and there may be certain gift and estate tax planning benefits. With a 529 plan, keep in mind that you may not have to live in the state that offers the plan you want to participate in and that many states allow you to spend the money for qualifying education expenses in other states. So, for example, the Michigan 529 plan allows you to live in, say, Tennessee and the funds can be used for a school in, say, Vermont. For more information about 529 plans, visit MiSaves.org.
3. As a general rule automate your contributions to the college fund. If you can automate, say, $50 a week, it will help you stay on track with meeting your college savings goals without the temptation to spend the money in other ways.
4. Understanding the future cost of college is also important, so you know how much to potentially budget for. Take into consideration tuition, additional fees, room and board. The website collegeboard.org publishes annual costs of college education and does a decent job of estimating the cost of college in the future. But be aware: don’t let the numbers overwhelm you and drive you down the dangerous road of letting saving for college trump saving for your own retirement. Work hard to find an appropriate balance with saving for college and saving for retirement given your financial goals.
5. Finally, encourage the student to apply for as many scholarships and grants as possible. Surprisingly, many scholarships go unused each year. Do the research; fill out the forms. It can seem like drudgery, but the effort often pays off in surprising ways.