What if you didn’t have to borrow money for college? It’s a very reasonable question. And it’s possible if you are willing to start planning early.
It seems some people are already getting the message. A new study by Sallie Mae, one of the largest private student loan providers, says that the number of parents saving for college is at a four-year high. In fact, 57 percent of parents of children under age 18 in this survey are saving for college, up from 47 percent last year.
That’s partly because of the improving jobs market but also because parents seem to be recognizing that saving in advance is far more beneficial than borrowing and paying back in the future. When it comes to saving for college, time is money. And starting early is the best college savings idea of all.
The survey also reveals that most parents — six in 10—are not using 529 plans with their tax advantages to do their college saving. So that leads my list of five things for parents of young children to consider early:
—Use 529 college savings plans. Money in these plans grows tax-free for college expenses. One family plan can be used by each of the children. And money saved inside a 529 plan weighs far less heavily against the family in the financial aid formulas. Your own state plan might give you a tax deduction from state income taxes for your contribution.
However, in the long run, costs and performance matter a lot more. So go to www.savingforcollege.com to review their latest performance reports on 529 plans, as well as five- and 10-year returns of each state’s plan. Remember, you can invest in any state’s plan — and the money can be used for college expenses at any accredited school.
—Encourage family saving contributions. Grandparents should be urged to add money to your 529 plan for birthdays and holidays. They can always withdraw their contribution (paying taxes on gains and a small penalty) if they need the cash — or if all their grandchildren turn out to be rude and ungrateful!
—Think now about the economy of the future. The time to start talking about college is when children are in middle school. They should know it is a privilege and not take it for granted. We have become so obsessed with getting into college that not a lot of attention is paid to what children are getting out of college. Learning skills that will be in demand in tomorrow’s workforce is more valuable than many of the courses students take today.
—Discuss college early. If you start those expectations in middle school, you’ll build a platform for a rational discussion by the time your child is ready to apply. If you know that travel is an expense you won’t be able to afford, start cheering for nearby schools’ sports teams. And although college is typically a four-year proposition, if you have several children you might prepare them in advance for the possibility of living at home and going to a community college for the first two years before transferring to university.
—Don’t fear money discussions. College is expensive. Period. Let your children know that you’re trying to save up — but that they should be trying to earn money now to cover their high school expenses, so you can save for college. And be sure to point out the headlines about the burden of student loans — and the interest that builds up over the years while they will be trying to repay any loans.
There is no doubt that the right type of college education will pay dividends in income far into the future. Preparing your child for college — both emotionally and financially — is a job that starts early. And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)