It's the elephant in the room. No, not that plastic pachyderm you've been tripping over all week as you shuttle kids to preschool, play dates and soccer practice. We're talking about the figurative elephant that so many parents, even supposedly frugal Vermonters, avoid discussing: saving for their children's college education. Maybe private school, too.
You're forgiven. It's an overwhelming topic, one that can sink the savviest savers among us. "The number of different approaches and attitudes toward saving for education is staggering," admits Rebecca Walsh, a wealth manager at Pathway Financial Advisors in Burlington.
Walsh is well schooled on the subject; her husband, Patrick Walsh, is an assistant professor of economics specializing in the economics of education at St. Michael's College, and they're raising two young children. Here, she and other Vermont financial experts share their two cents on how Green Mountain moms and dads can find the green to send their kids to school.
Who should pick up the check?
Ah, the $64,000 question. (An expression, to be sure, but also a good ballpark figure of what a year of private education might cost soon; see "Sticker Shock" sidebar, page 21.) The answer depends on a number of factors, including your upbringing, financial beliefs, realistic resources and familial relationships.
As Walsh explains, parents' thoughts on paying for private school or college typically fall into one of four categories:
Students should foot the entire bill themselves.
Students should focus on education, and therefore parents should pay for it.
Students and parents should share education costs (not necessarily equally).
Students and parents should depend on financial aid.
It's a good idea to figure out where you are on this spectrum, and discuss it with your children.
And it might be smart to ask them to pitch in. "There are good reasons to have children 'buy in' and have some skin in the game," says Pat Sokolowski of Burlington's Sokolowski Investment Advisors. Talking about money matters with kids can help them take more responsibility for creating a sound financial future. "Summer jobs, work-study programs and student loans are often excellent ways to have the child participate financially," she says.
But don't wait for your kids to be old enough to understand the importance of having a job; the sooner you can begin planning, the better.
Laying the foundation
Getting started doesn't necessarily mean coming up with a magic number to save, suggests Walsh. "Rather than sitting down and saying, 'How much should we put away for college?'" she says, "parents should ask, 'What do we need to do to get our financial house in order?" That includes
making a spending plan;
building a safety account with three to six months of necessary expenses;
paying down consumer debt (not necessarily mortgages or student loans if the interest rates are good);
adequately insuring your house, your health, and your income (disability and life insurance can help protect your income); and
investing for retirement.
The last point might seem less important than the others — after all, retirement comes after your kids go to college, right? But experts point out that robbing your retirement account to pay for education is foolish, as your kids have more ways to find funds for school than you do for sailing off into the sunset.
Once you've decided to start saving (um, now), there are two basic decisions: how much, and how. How much depends on how old your children are. Parents of a newborn could put away just $100 per month and see $48,000 at the end of 18 years, assuming they get an 8 percent average return.
As for how to save, one of the most popular options lately is a 529 plan, named for Section 529 of the national tax code and operated by states and educational institutions. "These plans offer a great vehicle for most parents, since the investments grow taxfree and withdrawals are not taxed as long as they are used for qualified educational expenses," says Sokolowski.
There are two basic types of 529s: prepaid tuition and college savings plans. The first allows you to lock in tuition prices at eligible schools. They're often guaranteed by the state and have residency requirements. College savings plans have fewer restrictions but aren't backed by the state, so your investment could lose value. See the sidebar below for a more detailed comparson.
Walsh reports that Vermonters have access to 77 different types of 529 plans, and the best ones aren't necessarily found in state. "Parents who primarily want a wide, low-cost investment selection are probably best served by 529s outside of Vermont," she says. "Parents who are more concerned about fees and could really benefit from the tax deduction may want to choose the Vermont 529."
If your child is planning to apply for financial aid and has other relatives contributing to a 529 account, you should not elect to be the custodian of the account, advises Walsh. "This strategy could improve the chances of a child receiving financial aid," she says, "because 529 accounts controlled by someone other than the parent or child are not considered an asset available for education funding."
But keep in mind that, while it's perfectly legal to appoint someone else as custodian of a 529, it may not always be the wisest choice, especially if Grandma has a thing for Vegas. "Someone could walk off with the money," admits Walsh, adding that there's a 10 percent penalty for withdrawing funds for noneducation purposes — which may not be enough of a deterrent for sticky fingers.
Roth IRAs, named for their creator, Sen. William Roth of Delaware, are also a good choice for both college and retirement. Parents should aim to contribute their maximum each year. "Savings put into a Roth come out without penalty if used to pay for qualified higher-education expenses," says Walsh, who adds that taxable savings and investment accounts are the next logical steps, after Roths and 529 plans, for college and private school.
Aid and a-betting
Wait a second — what about that "no saving" school of thought? Could having money socked away work against you when you apply for financial aid?
The short answer is no. "Financial aid is meant for those people who legitimately need help with the costs of higher education," says Sokolowski. "There are many elements of a family's financial situation that are reviewed when applying for financial aid, and the savings set aside for college is just one of them."
Instead of not saving, suggests Walsh, parents should find the best way to increase their family's net worth in anticipation of college costs. "Parents should not start thinking about how best to qualify for financial aid until freshman year of high school."
If you're afraid of goofing up, meet with a financial planner, and keep in mind that you're far better off tripping over the elephant now than not being able to budge it when your children are accepted to Harvard. "The biggest mistake we see is parents underestimating the cost of college and not starting to save soon enough," says Sokolowski. "Even small amounts, when set aside on a regular basis, can grow to a nice nest egg for college over the span of 18 years. We strongly recommend setting a concrete goal and planning."