How You Pay for College Determines How You Save for College

Many parents make the mistake of waiting until they are done saving for college to determine how they will pay for it. Typically, they will “back into” their funding plan, which will revolve around how much they saved. As many parents have found, the problem is that if they chose the wrong savings vehicles, their funding options could be more limited. For instance, if they decided to save using savings bonds in their children’s names, they could reduce the amount of financial aid available. Or, if they utilized a 529 College Savings Plan to fund college expenses for their only child, they will end up paying taxes and penalties if, for any reason, their child does not attend college.

While it’s impossible to predict the future, college planning, much like any financial planning, should consider as many variables and assumptions as possible. We’d all like to think our children will be high achievers and be able to qualify for scholarships; however, it wouldn’t be realistic to plan for it. However, we could assume that our children will work part-time in school to be able to pay for a part of their room and board. But then, it’s not easy to obtain part-time jobs these days, especially in a college town.

How to Plan for College Savings

So, what kind of planning can, or should parents do around choosing their college savings options? The answer recommended for most parents is to develop a plan with the greatest amount of flexibility, especially if you’re starting late (less than ten years). Other considerations, such as tax incentives, investment returns and costs, and liquidity are essential; however, the most important considerations are your personal financial situation, your education goals, and your ability to save for college in addition to saving for other priorities, such as retirement. Even before exploring your options, you need to ask yourself enough of the right questions, so you’ll be better able to narrow down your choices.

• How much of my children’s college expenses do I realistically expect to cover? It helps to have a number – an amount or a percent you expect to cover. If you expect your children to work during the summers or school, or you want to plan for a certain amount of financial aid, you can plan accordingly. An increasing number of parents are preparing for their children to attend a community college for their lower requirements.

• Should I be concerned with investment returns? Saving for college using savings accounts or CDs, although they may be the safest route, can be somewhat frustrating due to the low yields offered today. However, if your time horizon is shorter than eight years, you should be more concerned with securing your investment. If you have a longer time horizon, you may want to consider diversifying among growth investments, and then, as your time horizon grows shorter, begin moving your funds into safer vehicles. In either case, the more important concern should be setting aside as much as you can.

• Should I be seeking the tax advantages of a 529 College Savings Plan? While tax advantages can be helpful, they may not have the impact you would hope for in the short time you save in the plan. If you are in a lower tax bracket, the effect can be negligible. Even if you are in the higher tax bracket, the higher fees associated with 529 plans may offset much of the tax savings.

Your next step is to explore your options thoroughly. The answers to these questions should help guide you in narrowing down your choices. In the end, if flexibility is important, some combination of the options available to you will probably create the best college savings solution.