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Saving for College

What’s your plan for saving for college, by hook or by crook?  For most, the solution seems to be a combination of hopes for scholarships and a 529 plan.

The key to meeting any savings goal for a future expense is to maximize the time between when you save the money and when you need it. You cannot exert absolute control over your returns, but you do have better control over the amount of compounding return periods you have by managing when you save.

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Compounding returns are investment returns that build on previous investment returns (the longer they do this, the better). Making annual contributions would actually be worse than making a one-time contribution for the same amount at birth (or in the first year). Every year that passes means fewer years between the first year where funds are needed and the present (fewer opportunities for your money to grow for that need). Assuming most children go to college at 18, there are 18 compounding periods/years.

Using an example, if you were to save $75,000.00 (the max per contributor) in the first year, growing at 6% each year, you would have $214,000.00 at 18. If you made 18 annual contributions totaling $75,000.00, that same child would have $128,000.00! So, save early and try to front-load contributions. Contributions a few years from college may be less constructive (which speaks to how bad procrastinating is).

There technically is not a limit to what you can contribute to a 529 plan. However, the reality is that you would not realistically find the need to contribute something like a million dollars. What school would cost that much? However, you should consider tax rules around gifting. Specifically, you can contribute $15,000.00 per year by contributing individual (married couples can do $30,000.00 in total) to meet the annual gift tax exclusion amount. Just make sure you let your accountant know. You can also contribute $75,000.00 by contributing individual to a 529 plan for one child at one time. If a married couple does so, they can contribute $150,000.00 in one chunk. Doing so means treating the contribution as if it were spread over a five-year period for tax purposes. Meaning, you cannot use the exclusion for the remainder of that five-year period. Remember, this is technically a better strategy for growth. If you have many grandchildren, children, nieces, nephews, etc., you can make the same contributions for them.

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In terms of investments, I would recommend sticking with the age-based risk allocations. You can select a moderate-risk age-based portfolio or an aggressive-risk age-based portfolio, for example. The idea here is that you have a portfolio that will become more stable as the child approaches college, and you get to select the overall risk target for the account. Think of it kind of like a target-date fund in a retirement account.

Remember that there are other strategies for saving (other account types, tax credits, grants, scholarships, etc.), but the best thing you can do is save as much as possible as early as possible.

Consult with your Henry+Horne advisor to develop a strategy that best helps you save for college.

Drake A. Qualls

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