Few financial topics have the power to strike fear in a family’s heart like a discussion about saving for college. Tuition costs are rising faster than incomes, the value of the degree itself has been called into question, and student loans weigh on professionals well into their forties. Yet, many families are emotionally anchored to sending their children to college no matter what the cost.
While we can agree that a college degree is still valuable, families should be savvy shoppers and savers. Here are some of the savings strategies I recommend, as well as some other strategies about which I am more skeptical.
Virginia529’s college saving plan is a simple, cost-effective way to save for higher education costs. Virginia residents may also be able to claim a tax deduction on their state income tax return for their contributions. Ask your financial planner or tax preparer if this applies to you.
You can work with a financial planner to create a custom allocation using low-cost index funds within the Virginia529 plan, including the new Tuition Track portfolio, or you can use the target date funds (roughly the year the beneficiary will start withdrawing funds to meet education expenses). The target date funds automatically adjust your asset allocation to make your investments less risky over time. This is helpful because when your kids are young, you have time on your side. If the stock market tanks like it did last February, you can wait for it to recover. However, when your child is seventeen, you simply don’t have enough time to wait, so you don’t want to take on as much risk. The target date fund makes this adjustment for you over time. This is not the perfect solution for all college savers, but it’s certainly worth a look.
There is also an FDIC-insured savings account option within the Invest529 plan that may be suitable for some individuals who are already enrolled or very close to attending college. If your kids are young, weigh the benefits of a federal guarantee on your funds, versus the risk of inflation eating away the value of your money. An interesting alternative to the FDIC-insured account is the new Tuition Track portfolio. The Tuition Track portfolio is a principal protected Invest529 option that is tied to the average annual inflation rate of in-state Virginia public colleges and universities.
Virginia529 also offers a broker-sold option called CollegeAmerica. This means that some of the investments sold through this program pay a commission to the broker who sold them to you. If a broker suggests you participate in this program, ask what fees and commissions are associated with your purchase. It may make sense for you, or it may be wiser to use the direct sold Virginia529 program.
Parents can use a taxable investment account to save for college, but you lose the tax benefits of the 529 program. Roth IRAs are sometimes suggested as a 529 account option, but they have drawbacks as well. Primarily, Roths are really designed to be a retirement savings account, and you muddy the waters when you use retirement funds for college. Also, while your contributions can be withdrawn tax- and penalty-free for higher education costs, your earnings would still be considered taxable income unless you were over age fifty-nine-and-a-half and your account was open for more than five years.
Periodically, I hear life insurance agents promoting permanent life insurance policies as a savvy educational planning tool. It would be a rare situation where a policy with high internal costs and commission charges made sense for a family’s college savings. We’ve chosen to use the Invest529 plan for our children.
As you consider the benefits of saving for higher education, ask a fee-only, fiduciary financial planner what’s right for your family.