How do you plan to pay for something if you have no idea how much it is going to cost — like, say, how to foot the college tab for a future valedictorian still sucking on board books?
This school year, tuition and fees total $10,084 at the University of Minnesota, and the average at a Minnesota private college is $25,237. With college costs rising faster than inflation, you don’t have to pull out the calculator to figure out that your college savings plan should have started yesterday.
With so many unknowns — from what type of college Junior will attend to what your financial situation will be in the year 2021 — it’s no surprise that three-quarters of parents surveyed last year by investment company Alliance Bernstein admitted that they were worried about paying for college. (See page 40 for what Minnesota Parent readers have to say.) Furrowing your brow, however, will get you nowhere. Here are three steps that will get you closer to college savings.
1. Do something, even if it’s not much. When many parents are still paying off their own student loans, saving hundreds of dollars a month towards their kids’ education may be just a dream. But what about $50? In the face of a six-figure expense, that may seem futile, but our good friend compound interest will make even that paltry sum add up faster than you expect. Not only that, but you’re getting into the habit of saving. “What you’re doing is setting a base,” says Brian Kompelien, a Minneapolis financial advisor with Ensemble Planning and father of Matt, 5 and Emily, 8. You can up the amount later on when you can afford to.
If setting aside cash is not in the cards, you can shop your way to school with rewards programs such as
UPromise.com and BabyMint.com. Both put a percentage of your purchases into a college savings account when you shop at participating merchants.
2. Run the numbers. Don’t hit the panic button before you have some hard numbers. College cost calculators will spit out how much you should be saving for college based on your child’s age, the type of school you think he or she will attend, and your financial situation. The World’s Simplest College Calculator at
SavingForCollege.com told me I need to save about $700 per month to afford private school for my 4-year-old. (Eek! Panic button time?) Other sites that will compare college savings plans and calculate your little geniuses’ future higher-ed bills include CollegeSavings.org,
MNSaves.com, and FinAid.org (click on “Calculators,” then “College Cost Projector”).
3. Choose where to save. By far the most popular accounts for college savings are state-sponsored 529 plans. Parents, relatives — even your best friend in another country — can contribute cash to a 529. That money grows and can be withdrawn tax-free for qualifying higher-education expenses. Minnesota Saves, our state’s 529, rates highly in 529 surveys and has reasonable expenses, no commissions, and many investment choices. Price of entry? As little as $15 with payroll deduction. You can use any state’s 529 plan; where you save has no bearing on your kid’s college choice. Unlike many states, Minnesota doesn’t offer a tax credit to parents who save, but the issue is on legislators’ radar screen. Matching grants of up to $400 are available for parents whose adjusted gross income is below $80,000.
Future liberal arts students should consider the
Independent 529 plan, a prepaid tuition plan that allows you to buy credits towards a participating college at slightly less than today’s price. Minnesota colleges in the plan are Augsburg, Carleton, Concordia, Gustavus Adolphus, Hamline, Macalester, and St. Olaf.
Then there’s the ever-so-versatile Roth IRA. Yes, it’s a retirement account, but you can withdraw the amount you invest (but not the earnings), tax-free, at any time. Kompelien suggests those that qualify max out their $4,000 annual contribution to a Roth first. Beginning in 2008, the Roth IRA contribution limit increases to $5,000 per year. “What I like to do is have a variety of investment vehicles — it might be a Roth along with a 529 plan or personal savings … so if something changes with the laws or your situation, you’re not just stuck with one plan,” he says.
No matter what you plan, retirement savings, however, should always come first. Financial planners like to say that you can borrow for college but not for your golden years.
As the years pass, hopefully your pay will increase and your assets will grow. Your day care bills, which can be about as pricey as college tuition, will diminish. Joe Rapacki, a CPA in Edina who helps clients with college planning, says tapping home equity is a popular tactic with his clients. Others bank on a sizable inheritance or grandparents who generously foot the bill, but
you know what they say about counting those unhatched chickens. “Play it safe,” he tells them, or be at peace with the idea of student loans if the windfall never materializes.
Kara McGuire writes about personal finance for the Minneapolis Star Tribune.
