How parents can save for a child’s college education
When it comes to financing a college education, the complex web of savings plans, federal, state, institutional and private financial aid can be confusing and overwhelming.
Saving for college can be tricky because each family has its own set of financial concerns but it’s never been more important to save.
Investment advisor Kevin McKinley said “it’s better to save a little early than a lot later and it’s very important to save. What parents need to know though is you don’t have to come up with the entire dollar amount the day your kid graduates from high school.”
McKinley is a registered investment advisor and the owner of McKinley Money LLC, with offices in Madison and Eau Claire. He hosts a weekly call-in show on the Joy Cardin Show on Wisconsin Public Radio
The price of a four year degree has marched steadily upward for decades. Tuition and fees at most American colleges are surging faster than inflation.
At University of Wisconsin-Madison, undergraduate tuition, room and board and fees will cost $25,699.60 this year for Wisconsin residents and double that for out of state students. McKinley calls that a bargain compared to other public and private universities.
He said, “A college degree still has a great deal of value as long as kids use it appropriately and get a degree that has some kind of economic payoff. Sadly, you can go to an expensive liberal arts school and get a degree in philosophy but that’s probably not a great financial investment.”
McKinley’s No.1 piece of advice for parents wanting to save for college is to invest in the 529 college savings plan known as Edvest.
He said, “They get a small tax break on their deposits. They keep entire control over the money and any earnings are sheltered to taxation and any qualified withdrawals are tax free. If the kid doesn’t go to school, the parents can either use it for another child or pull the money out to buy something else. They have to pay taxes and penalties on the earnings but they still get to decide what to do with the money.”
How much should you save?
McKinley said “As much as you can. Try to save enough to cover one year and know through financial aid, loans, kid earnings and and your own earnings when the kid is in school that will be enough to hopefully cover the second, third and fourth years. Usually $100 to $200 dollars a month will be sufficient enough to keep pace with inflation of rising college expenses and that’s usually as much as most people can afford. Parents should also know that they should also save money for their own retirement as well. They should not sacrifice their retirement for their kid’s college. You can borrow money to go to college but you can’t borrow money to retire.”
McKinley said the biggest mistake parents make is having a hard time saying no when their child wants to go to a very expensive school.
He said, “Maybe they want to go to an out-of state public university or a private school and they’re not getting much financial aid for it. When you add up the net costs for it, if the costs are roughly even to what an in-state Wisconsin school costs, great, but if it’s going to cost them two or three times as much, it’s usually not worth all that extra money, especially if it’s going to set the family back from other long range financial goals.”
McKinley recommended that all families who need money take the subsidized or unsubsidized federal loans.
He said, “A lot of people worry because they hear about the median amount of money owed by four year school graduates right now is somewhere around $30,000. That sounds like a ton of money but what they don’t realize is, you can pay off a $30,000 loan over 10 years by making 1 percent of the original balance each month.So, a $30,000 loan costs about $300 per month to pay off over 10 years.”
Kevin said parents should fill out the Free Application for Federal Student Aid known as the FAFSA right away and do it every year.
He said, “Especially subsidized but even unsubsidized loans, they should take those and they can always pay them off down the road if they have money but it’s very difficult to go back and get loans they would have otherwise qualified for but didn’t get.”
McKinley’s website is OnYourMoney.com. He discusses financial matters every Thursday morning at 8 a.m. on the Joy Cardin Show on Wisconsin Public Radio.
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