Will your kids make it to your alma mater?

From Amanda Cuocci at The Sunday Refresh:

Last week, I (Amanda) attended my 10-year college reunion. It was a weekend filled with reminiscing, catching up with old friends, and sailing on the river in Southern Maryland.

With a campus like this, it’s hard to remember how I managed to get my work done…

Although the scenery hasn’t changed, one thing has: Many of my fellow alumni now carry infants instead of backpacks. It’s not surprising. We’re in our early thirties, which means we’re in the middle of a baby boom. And it got me thinking… As much as I love my alma mater, can I afford to send my kids here one day?

I’m not the only one asking this question. Many people in their 30s, 40s, and 50s worry about the skyrocketing costs of attending college.

To measure this increase, the nonprofit College Board broke down about two decades of tuition costs and based them on 2017 dollars. For an average four-year public college education back in the mid-1980s – when my father graduated – one year of tuition and fees ran an average of $3,160. In the 2017-18 school year, that average rose to $9,970.

And according to the Bureau of Labor Statistics, college tuition swelled more than twice as much as the consumer price index (CPI), a measure of inflation. From 1980 to 2014, tuition increased by 260% while the CPI increased just 120%. Researchers predict tuition rates will keep rising, too. Investment company Vanguard predicts tuition will increase at about 6% a year. That means children born in 2017 will face a private school bill (tuition plus room and board) of about $120,000 a year or $54,000 for public schools.

If you have a child or grandchild you’d like to help support through college, consider your options. Here are some of the most popular choices to help you get started:

The most popular plan is a 529 savings plan. These are plans set up by each state to help you save for college. Earnings are exempt from federal taxes, they compound tax-free, and withdrawals made for qualifying college costs (like tuition, fees, and room and board) are also tax-free.

And if you invest in a plan run by your home state, you could save on state income taxes as well. Keep in mind, these plans contain mutual funds, so you’ll need to watch out for high fees and maintenance costs.

As finance writer John Wasik notes, look for “direct-sold” plans. That means they come from the state, not a brokerage house that adds on commission and management fees. All those fees eat into your overall earnings, so keep them as low as possible. He recommends this comparison site for 529 fees.

You can buy plans in other states or national ones as well. And the funds can go to any college, not just those within the same state. What’s more, grandparents can get a tax break by contributing to a 529 plan, as long as you live in one of the states that allows this deduction. So you can increase the savings even more. (Read more about them right here.)

Prepaid tuition is another option. These plans sound like a good deal – you essentially “lock in” current tuition prices for your future college attendance. Imagine paying today’s tuition prices 10 or 20 years from now. With college price growth showing no signs of slowing, that’s huge savings… But these plans limit you. You have to attend a school in-state and only use the funds for things like tuition (not books or room and board, like the 529 plan allows).

Some prepaid options have stopped accepting new people. In fact, only about 11 states still offer these programs. That’s because states didn’t expect the exponential growth in pricing and lost a lot of money. They’re still worth considering if your state offers them and if you have plenty of in-state schools for your child to choose among.

Some people might also consider EE bonds, or U.S. savings bonds. These used to be popular (I still have some socked away from my childhood). If you use them to pay for education, you don’t owe taxes on the interest. But they take 30 years to mature, meaning they take a lot of early planning. Plus, the rate of return is low right now, so you’d do better investing your money elsewhere.

Finally, you can tap your IRA. If you’re still interested in tax-savings, consider an IRA. You can make withdrawals before the age of 59 and a half without penalty if it’s for qualified education expenses. Some of the funds might incur a 10% tax, but the rules involve calculating adjusted qualified education expenses. You can find more about that right here.

We don’t particularly like the IRA strategy for one simple reason: You risk giving up your retirement savings. As much as you love your kids and grandkids, don’t sacrifice your long-term retirement plans to pay for their college. Make your plan for college savings separate from retirement and allocate your resources accordingly. Remember, your kids likely won’t pay for your retirement. So be sure to take care of your own future as well.

Now, there’s one more tip we love for saving money on college… a great way to save up to 50% on tuition. Our boss, Dr. David Eifrig, covers it in depth in his newsletter Retirement Millionaire, in a report called “The Retirement Guide to Freebies.” Current subscribers can read it right here.

And if you aren’t a subscriber yet, we have a special offer for you. Retirement Millionaire is a great way to understand how to empower yourself to prepare for your financial future. We pack each issue with portfolio recommendations, market insights, health tips, and money saving tips anyone can use. Click here to learn more.

Here’s to a fresh start,

Amanda Cuocci & Laura Bente

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