How to Solve the College Savings Riddle

Paying for college: For many parents, it’s the ultimate riddle. When you look at how the costs have risen over the last thirty years, well – let’s just say you should probably be sitting down first. No wonder student debt has topped $1 trillion. At the same time, a college education “has never been more valuable,” said David Leonhardt at the NY Times.

So, how to solve the riddle?

For those with no savings at all

By now you’ve probably heard a thousand morals on the importance of starting your fund as early as possible: when your child is born (or earlier!). If you haven’t been able to do this, you may feel you’ve dropped the ball. But let’s sidestep the guilt in that equation, and skip to what really matters.

There’s an adage in sports: the hardest part of an athlete’s workout is getting started. According to Olivier Poirier-Leroy, a former national-level swimmer, there are two secrets to overcoming this:

• “Commit to starting, and nothing else.” If you make starting the goal, you’ll succeed as soon as you take the first step.
• “Start small. Keep everything bite-sized.” Can you skip a coffee? Save some loose change? Cut the cable bill? Do what you can, no matter how modest.

So far, so good. But what should you do if every penny in your budget is already spoken for?

How to come up with the cash

First step, evaluate the resources you do have, from the presents your kids may receive on holidays to the cable bill you don’t absolutely need. When relatives send birthday cash, put it directly into savings.

Then, look out for windfalls. When you get a raise, a bonus or an inheritance, ask how much of it you can deposit into your child’s college fund.

Finally, don’t forget your kid’s ability to save their own money. Here’s an inspiring story about a Tennessee boy who funded his education within five years by selling newspapers once a week.

Once you’ve figured out where the money will come from, how can you make the most of it? Better question: have you ever heard of a 529 plan?

Featured strategy: the 529 plan

529 plans are State-run college savings or investment plans. They’re an extremely effective way to fund your child’s education, but surprisingly, most Americans (72 percent) have never even heard of them.

How do they work? “You set aside the money and it grows tax-deferred,” said John Wasik at Forbes.

• Tax-deferred? Don’t get caught on that word “deferred.” As long as the money eventually goes to education (tuition, books, lodging, etc), it won’t be taxed, ever.
• Who can benefit? 529 plans are not limited to just one recipient. As long as the expenses are educational, the money can go to anyone in your family.
• Local plans only? You don’t have to stick with a plan from the State where you live. If you like an out-of-State plan better, invest in that instead.

529 plans are not the only option. There are savings accounts, Roth IRAs, Coverdell accounts, savings bonds and trusts. To explore their pros and cons, see Nerd Wallet has to say.

And for guidance on which approach makes the most sense for your family, count on the Heffernan financial services division to be your resource. We’d love to help you arrive at a plan that will really work for you and your child.