The Best Ways to Save for College

Helping a child or grandchild pay for college has to be in the all-time top 3 goals of my clients. In fact, one of the most frequently asked questions by my clients at Glassman Wealth Services is, “What are the best ways to save for college?”

Despite escalating costs, and all the recent debate as to whether the results of that four-year degree are worth it, having a college education is still the best route to financial success. This was confirmed by the Economic Policy Institute in Washington, D.C. that found those with a four-year college degree made 98% more an hour on average in 2013 than those without a degree.

As college tuition and expenses continue to escalate, it’s more important than ever to start saving early, know how much you will need to save, and enroll in a college savings program to help you meet your goals.

How much does college cost?

Before you can know how much to save for college, I recommend you do some homework to understand what type of college you want to fund, whether public, private or Ivy League. Most people are not aware of just how expensive college has become, or of the wide cost disparity between colleges. This chart illustrates the hypothetical (and astonishing) cost of 4 years of college (tuition, room and board) for a child born in 2014:

Our favorite college calculators:

For those who want to narrow their focus even further, there are great resources that can help determine exact tuition rates for a specific state or a particular school, and project the costs when the student will enroll in college. Some of the best 529 college savings plans (I explain what these are later) have the most user-friendly calculators available. Two of my favorites include:

• T. Rowe Price College Investment Calculator
• American funds College Cost Calculator

How much should you save for college?

For many people, saving enough to cover all the college costs for one child, let alone several, is simply out of reach. We recommend that you start early and try and save at least some amount each month. For those who have the means to fund most, if not all college expenses, a good rule of thumb is to use a 529 college savings plan to save 75% of the expected cost to avoid over-funding. The 25% coverage gap could come from current cash flow, scholarships, and loans to the student, or other means.

What are the best ways to save for college?

I recommend that you look into 529 college savings plans because of the benefits they offer. They were created to incentivize college savings over time, and there’s a wide array of plans available since most states and some private institutions sponsor their own.

Basically, there are two types of 529 savings plans – Pre-Paid Tuition Plans or Savings Plans. While there are distinct differences between the two types of plans, they work similarly and have three key benefits:

• Contributions grow tax-free if used for qualified education expenses
• You may be able to write off contributions on your state tax return
• Dollars in a 529 plan are outside of the grantor’s estate, and you may continue to have control over whom the beneficiary is and how the dollars are invested.

1. Pre-Paid Tuition Plans let you to lock-in today’s tuition rates. Semesters or years of tuition can be purchased and later redeemed for the student at participating colleges. Make sure to carefully read through the plan as the details are very specific to each plan.While the money invested in these plans can only be used for tuition and fees, it is an attractive option to control future college costs. The down-side? If the student elects to attend a college that does not participate in the pre-paid plan you chose, then the credits you purchased may have a lower value than expected, or you may simply receive a refund of your money.
   

   Best for: Those who are willing to accept more restricted geographical areas or college choices for the opportunity to lock-in today’s prices for tuition and fees.

2. Savings Plans work like an investment account where dollars are deposited and invested. The value of the account is subject to the markets and the growth (or decline) of the investments that were selected.There’s greater flexibility with Savings Plans since tax-free withdrawals can be used for tuition and fees plus other qualified expenses, such as room, board, books, and supplies. Also, the student can use the dollars at any college, university or secondary education institution. Contributions are limited to the annual IRS gift limit (currently $14,000 per person per beneficiary in 2014), but a special rule allows a large lump sum deposit that can be counted as a 5-year gift if you want to make the contribution up front.
   

   Best for: Those who are comfortable with investment risk and want the flexibility to use the dollars at any college or secondary institution for any qualified education expense.

There’s a lot to consider, so we put together this useful guide – The Best Ways to Save for College to help our clients build a better college savings plan.

Top college savings plans:

We are often asked, “What are the top college savings plans?” Many independent companies rank plans based on fees and performance. The plans below are consistently rated at the top in the country:

• Maryland/Alaska (T. Rowe Price)
• Nevada (Vanguard)
• Utah (UESP)
• Virginia (American Funds)

The College Savings Plan Network has a very good website that lets you compare 529 plans by state. Savingforcollege.com is a comprehensive site where you can learn more about 529 plans, compare plans, and calculate college costs.

My hope is that I have helped you gain a better understanding of the costs you can expect, and the best ways to go about saving for that college dream. Keep in mind that helping to pay for college is a direct investment in your child or grandchild’s future – one that will continue to pay dividends over your lifetime and theirs.

Understanding your college savings options and how much to save can be challenging. That’s why we put together this College Savings Guide. You’ll find what you need to know to make the best decision for you and your future college student.

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