College Savings Check-In
Our eldest daughter will turn 8 this year and along with that comes a scary realization . . . we have only 10 years left to save for her college education!
Even scarier? Based on standard financial advice that you should not put at risk money that you need in 5-7 years, we have only about 3-5 years left for any aggressive investments for her. After that, it is low-interest earning CDs and bonds which will not build savings quickly.
I have been trying to learn how to be a better long-term saver when it comes to retirement saving and it has been a long and steep learning curve.
But when you look at saving for college, it is truly even more challenging than retirement saving. You have at best half as much time to amass almost as much money!
Can you even afford to be saving for college?
It is instinctive that high achieving parents want their children to go to college and want to help if not fully fund college for their children. But is this a realistic expectation? Many financial advisers are now telling people that unless you are fully funding your retirement and have money left over to invest, the answer for you (and your children) is that you don’t have enough money to be saving for college.
Ouch! That answer really stings and hurts if it applies to you.
If you don’t believe this is true, consider a few things. The cost of college is rising at an astronomical rate compared to wage-earning power and every year becomes more unaffordable.
You can also run some specific numbers for your child.
1) First, choose a representative school that your child might attend and find out the current cost of that school, using the National Center for Education Statistic’s College Navigator search tool. You might choose a community college, a state school or an expensive private college, depending on your child’s educational goals. For example, the University of Virginia (a wonderful state school if you can manage to be admitted!) currently costs $25,325 per year for an in-state student living on campus and $15,546 per year if you can live at home with your parents during college.
2) Take the annual tuition cost and plug it into the calculator at Saving for College.com. Put in your child’s age and then on the next screen you can adjust how much the college your child will attend costs. For the University of Virginia example, starting saving right now at age 8, you would have to save $530 – $863 per month until college to have enough. (Note: this assumes you can earn at least 7% per year in your college savings account, which is ambitious.) Even providing the cheapest college option for your child (attending a community college for 2 years and living at home), will require you to save approximately $100 per month from birth. If you have more than one child to save for, these costs multiply quickly.
So, what if you run these numbers and saving for college is scaring you to death?
The 20/20/20 (or one-third) Plan
Financial columnist Ron Lieber of The New York Times shared a strategy on NPR called the 20/20/20 plan. This plan, developed by financial planner Kevin McKinley, suggests that parents divide the cost of college into three chunks: a portion saved before college starts, a portion saved while the child is in college and a portion taken out in loans. For example, $20,000 prior to college, $20,000 in college and $20,000 in loans. If you pursue this strategy, you are assuming you will have more disposable income by the time your student is in college and that you will also be able to pay back any loans after your child completes college.
Suze Orman: Don’t Ever Cosign for Private Student Loans
Suze Orman recently gave a tip to parents tempted to make up the difference in their college savings by cosigning for private student loans for their children. Her advice? Don’t ever do this! Suze advises that parents should only cosign for federal student loans, not private student loans. (Of course, if you happen to have the rare student who has a 6-figure job waiting after graduation, this rule may not apply to you.)
Suze also provided a brave guest who laid bare her financial mess after borrowing almost $200,000 to attend art school, most of which was co-signed by her parents. This creates a huge financial problem for both the student and the parents and is a good warning to us all.
Students: Don’t Attend a College that Will Require You to Take out More Than Federal Student Loans to Attend
Ron Lieber also gave a general tip to students (echoing Suze Orman in the video above) that if you have to pay for college on your own, you should generally never borrow more than the maximum limit on federal student loans. Even though more loans may be available to you via private sources, Mr. Lieber advises that students have a far better chance of paying back their loans by sticking to the federal student loan limits.
What are your strategies for saving for college for your children? Do you find these savings targets achievable or intimidating? Please share in the comments.