My wife and I are extremely practical and have been saving for our kids’ college since the day each of them was born. Knowing they will never have to borrow a dime to pay for school gives us great peace of mind.
Actually, that is a tad misleading. And by a “tad,” I mean entirely. We’ve saved exactly nothing for our 6-year-old son and 4-year-old daughter. We meant to start accounts, of course. We saw those commercials showing couples with babies sitting around talking about their college financing plans. A few of the clueless couples made excuses for why they hadn’t started saving, but the really together couple (the one with the smartest-looking baby) explained how they had started a plan and how easy it was to do. That was the couple we were going to be.
Instead, six years went by and. . . zippo! Sorry, kids, your parents are procrastinators. In our defense, there were bills to pay: the mortgage, day care, home repairs, our own student loans and a new car to replace the storm-damaged one. And, yes, frivolous things, too, like cable television, the occasional meal out and, oh, good Lord, did we really spend that much at Whole Foods?
When people ask about our kids’ college plan, I raise my finger to my lips and whisper conspiratorially: home school. People make the mistake of thinking home schooling is only for grade school and high school. But they’re missing out on the years when it can really pay off for them. Everything is learnable with the Internet, and at the least the kids will become proficient at Twitter.
I reached my home-schooling-for-college epiphany when I began tapping numbers into a college savings calculator last year and discovered that if we planned to save enough to pay for our kids’ tuition and board we should be putting aside $700 a month. For each of them. My wife and I had a good laugh. Instead of prompting us to start saving, this prompted us to start buying Powerball tickets.
We’re not alone, of course. Most American families don’t have a plan for paying for college. Just 36 percent of middle-income families and 29 percent of low-income families have set aside money, according to Sallie Mae’s “How America Saves for College 2013″ study that came out this year. And the percentage of families who are saving and the amount they’re saving have both declined significantly since 2010.
The average family plans to save $38,953 per child for college. However, the study points out that “on average, parents will [really] save $19,784 per child by the time their children turn 18.”
In other words, about half.
Predicting what college will cost 10 or 20 years from now is an imperfect science. But the cost of attending a public college grew at 6.5 percent a year between 2001 and 2010, according to the U.S. Department of Education. At private colleges, the cost grew at a 5.7 percent rate. It’s not inconceivable that your college bill could come in about $275,000 or more in just a little more than a decade.
The rate of increase in college costs has diminished somewhat in recent years, according to the Trends in College Pricing report released last month by the College Board, a nonprofit higher-education organization. But the costs are still astronomical, and even families already saving for school will have saved only a fraction of what they will need to pay.
The Sallie Mae study reveals that when parents were asked how they felt about saving for college they were twice as likely to respond “overwhelmed” than “confident.”
My wife and I are certainly in the overwhelmed category. More precisely we’re in the “let’s just not think about it and it won’t exist” category.
Apparently that is not a sound financial strategy.
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When Mark Kantrowitz tells me he began saving for his children’s college education before they were born, I can sense my coping devices kick in. First, I want to hang up on him. Then I grouse silently about overly responsible parents.
But I keep my grumbling to myself. After all, I’ve called Kantrowitz for advice. He is publisher and senior vice president of Edvisors, a collection of websites that provide information on planning and paying for college.
I start off by telling him that my wife and I have socked away money in our 401(k) plans on the theory that we think it will be easier to borrow for our kids’ college than to borrow for our retirement.
“That’s a typical argument, but it’s basically an appeal to selfishness,” says Kantrowitz. “Saving first for retirement is assuming that someone else is going to be paying for your college costs.”
I try to make the case that there isn’t a lot of extra money to be siphoned off for a savings plan. This gains me little sympathy.
“I think people’s spending patterns rise to consume all available income,” he says. “I know doctors earning six figures who live from paycheck to paycheck. Most people are living at or above their means. But you don’t need the brand-new car. You can live in a smaller house. You can always find ways to cut expenses.”
He lays out his advice. These are savings basics, but they bear repeating for people like me who can stare obviousness in the face without being struck by it.
Pay off credit card debt. Create an emergency savings account (three to six months of salary) and don’t touch it. Create a college saving account (he recommends 529 college savings plans rather than prepaid tuition plans) and have your contribution automatically deducted from your paycheck so you don’t have temptation to spend it.
Contributions to 529 accounts are especially attractive, as they are tax deductible in 34 states, including Virginia and Maryland. Kantrowitz also recommends that any time you receive a windfall — tax return, inheritance, scratch lottery winnings — put half into your college savings plan. If you get a raise, increase your contribution to your plan.
These are all sound practices, but I still have a savings-aversion ace up my sleeve. Won’t saving hurt us when we try to get college aid for our kids down the line?
Wrong, Kantrowitz tells me. Borrowing is always more expensive than saving. And although a college considers how much you have saved when it assembles its financial package, it’s not as much of a factor as you’d think.
Within hours of talking to Kantrowitz, I’m checking with my accountant (I meet with him for only an hour each year when he does my taxes, but I insist on calling him “my accountant” because it makes me feel special).
I want him to poke holes in Kantrowitz’s advice. Instead, he confirms it. He also reminds me that most families don’t bother to create a budget and the problem with not budgeting is that money slips through your fingers without you even noticing it. Do my wife and I have a budget? Of course not.
My conversation with Kantrowitz and my accountant persuaded me to start saving for my kids immediately. Finally, I had clarity. Then I talked to Jeff Bogle.
Bogle worked for 10 years in the financial industry before leaving five years ago to become a stay-at-home dad in a Philadelphia suburb and start a parenting blog, OWTK, or Out With the Kids. Earlier this year he wrote a provocative against-the-grain post about how he and his wife, who also works in finance, stopped contributing to their daughters’ 529 plans. They had been putting in $1,000 for each of them every year, which, after 18 years at a 5 percent return, would leave them with about $29,500. That would be enough, they figured, to pay for a year of room and board at a public college.
They decided the return wasn’t worth it. They opted to spend the money on sharing enriching opportunities — travel, art, cooking classes, music lessons — with their children, now 9 and 6.
“The goal is for them to be cultured, to have experiences, to see the country and the world, and for us to do it all together,” Bogle says. “Life isn’t all about building up a resume to get into college. Kids are doing volunteer work just to check a box when they don’t even feel strongly about it. And there’s an idea that’s been created out there that parents aren’t being good parents unless they’re saving everything they can to help pay for their kids’ school.”
I like this Bogle guy. He’s speaking to me. But I’m just not sure I can go all in on leaving so much to chance. Bogle is more sanguine than I am.
“I don’t know if it’s a perfect plan,” he says with a laugh. “We’ll just do it and sort of hope for the best.”
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I wanted this issue to be made simpler. Instead I’m left mostly with questions. College is not something I want to provide gift-wrapped for my kids. I want them to work at real jobs in high school and college. I think leaving college with debt is a good incentive to get a job. It was for me.
But debt can also be soul-crushing. The average debt for students who have borrowed for college is between $24,000 and $30,000, according to the College Board. Which may be manageable if you are a nurse or an engineer or a programming whiz, and jobs are waiting, but not so much if you are an English major.
Somewhere there’s a sane financial path for helping your kids with college. But how many dollar bills do you need to wrap around your child’s cocoon to feel you’ve done enough? How do you make the present comfortable and enriching for them without jeopardizing their future?
The growing unease that ordinary Americans feel about paying for their children’s college is not going unnoticed, says Megan McClean, director of policy and federal relations at the National Association of Student Financial Aid Administrators. Students and families are becoming more vocal with their concerns. Next year, Congress is scheduled to take up the reauthorization of the Higher Education Act, and, McClean says, “college affordability will likely play a very big part of that.” I hope she’s right and that legislators embrace their responsibility to help make college more financially attainable. If there’s one institution I still have faith in, it’s Congress.
For now, my best financial plan still feels like Powerball. And even I’m smart enough to know that can’t be a good thing.