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Planning for College

When I first started college at CU Boulder, there were plenty of opportunities to expand my knowledge and be an engaged student. There were also just as many (if not more) opportunities to skip class and mess around. This is a reality that many parents might be aware of but aren’t necessarily equipped to prepare their kids for. I was fortunate enough to have parents who offered to cover my education expenses, but they were wise enough to implement some ground rules. Any semester that I got below a certain GPA meant that I had to pay for that semester. I started off strong, but I fell short once or twice, which led to graduating with student loan debt.

This was an invaluable lesson for me to learn, and I plan on implementing a similar plan for my kids because I want them to understand the value of what they are undertaking and the importance of not taking it for granted, especially given the trajectory of inflation related to college expenses. I recently checked my own plan and was reminded that our planning software assumption of the average annual cost of a private school in today’s dollars is around $57,570 per year and assuming that grows at an average estimated annual inflation rate of 6.26% we could be looking at annual costs in excess of $150k per year in 16 years. This is certainly not a cost I’d want to incur if my kids aren’t going to take it seriously.

Another question I like to ask of clients when they are starting out on the college planning process is, “If you were forced to choose, would you want to achieve financial independence earlier or work longer in order to fund your child’s college education?” It can be helpful to consider this question in order to understand how earmarking savings for college can impact other goals one might have. As you can imagine, the answer to this question can vary from person to person, especially since our emotional propensity to save for children can be extremely high.

When thinking about planning for college education expenses, one might consider contributing to a 529 savings plan. Contributions into 529 plan accounts grow tax-free if ultimately used for college expenses and certain states also offer plans that allow for state-tax deductible contributions (CA is unfortunately not one of those states). However, some families could risk “over-funding” the account if their children get a scholarship or take an alternative path. Another challenge when using a 529 plan, is many can get caught up with trying to determine the exact dollar amount that might be needed for college expenses. Attempting to predict the total cost of college is similar to thinking that one can “time” the market when making investment decisions. We simply don’t believe it can be done because there are so many variables that can impact the future cost of college including inflation, the variability of tuition costs across institutions, the amount of time spent in college, etc.

For all of these reasons outlined above, we have found that the best course of action for those who aspire to help save for future college expenses is to consider starting off with a nominal contribution to a 529 plan that won’t adversely impact their overall financial plan and cash flows.

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