And you thought studying for finals was stressful. Try saving for your kids education.
My coauthor Matthew’s youngest child was born only a month ago. And already he’s planning – and quite honestly, worrying – about how to pay for college.
I’m withdrawing funds from my final 529 plan to cover tuition for my daughter.
One thing is certain: Over their lifetime, college graduates gross $1 million more in earnings than those without degrees. But paying for it can be daunting, especially if you have to pay all at once. For some families the price tag exceeds the cost of their home. Thus starting a savings plan early is critical. Fortunately, compounded savings eases the financial burden, and two of Virginia’s four sponsored 529 plans will help you make the grade.
The State Council of Higher Education for Virginia study reports that the average costs for a year at a public in-state college or university costs $15,642. For every dollar you spend at an in-state college, only 36 cents goes toward tuition. Room and board account for 42 cents, and the extra 22 cents covers books, supplies, transportation and other costs.
Expect an average price tag of $28,832 if your child enrolls as an out-of-state student or $35,636 if he or she attends a private college. Aid from grants and tax subsidies help reduce the price about 40% on average. However, those families making over $100,000 income should not expect much help.
The state government can’t afford to bail you out. State governments are enduring cuts that are raising tuition costs and reducing scholarship opportunities. As a matter of fact, the State’s prepaid college investment plan suffered tremendous losses last year. Their annual report states, “The Virginia Prepaid Education Program (VPEP) ended the 2009 fiscal year with net assets of -$284.0 million (actuarial deficit). The actuarial deficit as calculated by the Plan’s actuary represents the amount by which VPEP’s assets are less than the present value of its obligations.”
Stay away from these state sponsored pre-paid tuition contracts. They provide a pitiful return on your money if your child goes out-of-state or the private route and it is just one more government promise that we should all live without.
Virginia sponsors three other plans which offer the ability to save in individually owned 529 college savings accounts which all provide state tax deductions for investing.
Saving for college requires time and money. The more you have of each, the better. Time puts the miracle of compound interest on your side. And the more money that is earning money, the less you need to continue contributing.
There is no such thing as saving too early, even for Matthew’s youngest child. Saving early can cut the cost of his college education in half. Imagine his child goes to UVA. Currently four years of tuition costs about $47,000. But by the time Matthew’s son is ready to enroll, the price tag will have risen to $98,960. The earlier Matthew and his wife begin saving, the more manageable the monthly amount that should be saved.
Saving early allows you to buy your education at a discount. After saving $225 a month for 18 years, the newborn’s college savings account will have grown to $98,960. An astonishing $49,235 of that amount accrued through the magic of compound interest. The great benefit of a 529 plan is that all the growth in the account can be withdrawn tax free.
Those with the money upfront could deposit $26,500 and let compound interest generate the remaining $72,460. Buying a college education for a 73% discount while receiving several years of tax deductions is a deal those with money should not pass up!
My daughter’s 529 plan was first funded at the end of 2002 and has experienced a time-weighted return of 88.3%, or 9.4% annualized, since then. Yes, it was once up 121.6%, or 17.7% annualized, but it has still earned over $30,000 and saved us a tremendous amount of money.
If you cannot invest a large sum now, save a little every day. Started young enough, even a few dollars a day will pay the tuition at many public schools. By investing in a college savings plan, your money can grow faster than the inflation rate of higher education. These costs have been rising at a rate of 5%, and over the past 10 years, tuition at public schools has gone up more than 50%. If you are not saving for college, you are falling behind.
Saving for college is a critical part of financial planning. But saving for retirement is even more essential. You can borrow money for college but not for retirement. So prioritize your savings plan based on your specific situation.
Virginia sponsors two 529 plans that have been perennially ranked in the top five in the country. For more information on the College America and the Virginia Education Savings Trust (VEST) plans, visit www.va529.org.
Saving for college should be part of comprehensive wealth management. Only a fiduciary has a legal obligation to sit on your side of the table and put your interests first. The National Association of Personal Financial Advisors website (www.napfa.org) lists fee-only advisors in your area.
David John Marotta is President of Marotta Wealth Management, Inc. of Charlottesville providing fee-only financial planning and wealth management at www.emarotta.com. Questions to be answered in the column should be sent to questions [at] emarotta dot com or Marotta Wealth Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.
