College Savings for Planners and Procrastinators

See the original article which appeared on AmeriForce Media. It was originally written by one of their Staff Writers.

Ameriforce -- If you are having a tough time putting aside money for your child’s college education, you are not alone. A recent study shows that fewer than half of all parents are making college savings a priority, while those who are saving for future education expenses are having a hard time keeping pace with the rising cost of a four-year degree.

“Parents understand the importance of saving for college but putting theory into practice is easier said than done,” said Ipsos Vice President Michael Gross, whose market research firm conducted the study “How America Saves for College 2015” for lender Sallie Mae.

With the average cost of tuition, fees, room and board for the 2015-2016 school year reaching $19,548 at public colleges and $43,921 at private colleges, saving for college has become increasingly challenging for the average family. While saving for an infant’s college education may seem like a pipe dream to new parents who are stretching dollars to pay for diapers and baby gear, there is no question that it is the best time to start saving.

“[The] Sooner the better is always the proper mantra to listen to,” says personal finance writer John Wasik, author of The Debt-Free Degree. “You get compounding over time, you get earnings reinvested. The more time you have to save the better off you are going to be. It is really tough to play catch-up.”

The “2015 How America Saves for College” study found that the majority of college-savers are using traditional savings accounts (48 percent) or checking accounts (23 percent) to sock money away for college expenses. Only 27 percent were using 529 College Savings plans, a tax-advantaged account, which gets high marks from most financial advisors.

Joseph Montanaro, a Certified Financial Planner with USAA, recommends investing college funds in a 529 College Savings Plan, which provides not only ease of use and low minimum contribution levels but also enable investment earnings to grow tax-free as long as withdrawals are used for qualified education expenses.

In addition, investing in your home state’s 529 Plan may provide state income tax savings. “The unique tax advantages that come with a 529 College Saving Plan make it my vehicle of choice for college savings,” he says.

Montanaro says “safer, more stable” investment choices such as CDs, savings and checking accounts do have a place in a college-saver’s portfolio, especially as kids approach college age. However, he cautions parents about a cash-only approach when building a college fund. “Inflation is a threat that has to be dealt with, typically by saving more or incorporating investments that have historically outpaced it,” he says.

While 529 plans offer a wide range of investing options, Wasik believes aged-based plans, which automatically and gradually shift funds to less-risky portfolios as a child nears college-age, are the best option for most families.

“If you don’t choose them, you have to figure out the percentage to have in stocks and bonds. People mess that up all the time because it is not easy to do, especially over a period of 18 years. If you are late starting to save, it is even tougher because you can’t take market risks.”

–  Andrea Downing Peck