With the recent hubbub on Wall Street, Americans are worried about their long-term financial picture. We already saw what happens to our pensions, retirement accounts and college savings when stocks plunge. While it’s natural to be nervous, 2015 isn’t 2008. The last financial crisis hit everyday Americans hard because it involved the housing market, taking a chunk out of home values and warping most Americans’ greatest source of wealth or largest chunk of debt. The interconnection hit just about everyone, crippling rental markets, halting loans and curbing spending in virtually every sector. That’s not the case this time.
But even though this September almost certainly won’t be as rough as the one seven years ago, it makes sense to use this opportunity to move your college savings portfolio over to some savings that don’t rely on the S&P 500 or don’t rely on stock prices as heavily as the traditional “blindly throwing money into a mutual fund” savings plan does.
Question: It seems like college debt is a hot topic right now. Is it really that much more expensive and different than when I went to college?
Answer: For Americans whose social events and all-night cram sessions are a fuzzy memory, it can be difficult to understand what’s happening in the lives of college students today. After all, many of us worked a part-time job in college. Some of us even worked full-time or cobbled together multiple part-time jobs and summer work into enough money for tuition, books and ramen. That’s really not the case anymore, because tuition costs have outpaced virtually every other everyday good. In 1978, a student could work a summer job and earn enough to pay a full year’s tuition, but for the last decade, the average university’s tuition has hovered right around a year’s full-time pay at minimum wage.
Question: I’ve heard a lot of politicians talking about the debt problem. Can Congress fix this?
Answer: While lawmakers have been talking a lot about tuition, they’ve gained little traction on the topic, so your faith in Congress might be somewhat optimistic. Bear in mind that Washington is also part of the problem: in the wake of the financial crisis, the federal government shifted costs to the states, which then shifted support away from universities. Students pay a much larger share of their college costs than they did even a few years ago. If you’d like more information on that, check out Slate.com’s or the New York Times’ coverage of Louisiana’s budget crisis from earlier in 2015.
Question: Bottom-line it for me. How much do I need to have saved for my kids to go to college?
Answer: The best estimates have the typical public university charging around $250,000 for four years of tuition in the year 2030. A traditional strategy is to save one-third of tuition, pay for one-third of it with your salary at the time, and trust your child to come up with the rest. That means you should aim for around $85,000.
Question: Can I do that without the high returns of a stock portfolio?
Answer: Stocks offer a wonderful rate of return, but they do so in exchange for higher risks. You probably want to have some investments in stocks and some in savings, with the ratio determined in consultation with one of our professionals. The good news is that there are a variety of programs to help you, many of which offer the freedom to put money into stocks or savings.
The most popular savings plan for college is the 529 plan. Contributions to a 529 account offer tax benefits, although the plan comes with an annual contribution limit. Talk to a professional about your particular situation, because it varies from person to person and because the rules change so often it really takes a professional to understand them. You can talk to our savings pros by calling 330.493.8325.
The next most popular option is the Coverdell Education Savings Account. Coverdells are designed for your child to use for their education and offer tax benefits that are similar to 529 plans, with a few differences you can learn about from our savings pros. Some of the major benefits are that a Coverdell can be tax-free when you put money in and when your child takes money out and that the excess funds in an ESA are distributed to the student, creating an incentive to filling out all those financial aid forms.
Question: What if I need to be able to get my money in an emergency?
Answer: Don’t ignore the benefits of our traditional savings products. A money market account doesn’t offer the same tax benefits as a 529 plan or an ESA, but you can easily access your money if a crisis comes up. After all, you can find financial aid for college, but you can’t always get a loan for an emergency.
Money market accounts offer a great supplement to other programs as well, because there’s no contribution limit. You could max out your 529 and Coverdell accounts and still put money into a money market account. Then, not only are you putting more savings together while keeping some available for special circumstances, you’re also preparing for a year in which you aren’t able to contribute $16,000 into a tax-protected account: just withdraw from your money market and put it into one of the other accounts to receive the tax benefits.
Whether you’re just starting out and need to put away a little cash that you might need later or you’re interested in putting together a king-sized war chest, money market accounts can be the most versatile and safest part of your future college student’s savings portfolio. We offer high rates and we can start an account for you with a balance as low as $5.00. It’s a great way to start saving for college even if you don’t have very much to put away.