One sign of hope coming out of the huge student loan crisis lately is that parents are starting to save more for future college expenses. According to Fidelity in 2016, families saving for college has increased from 58% to 72% over the past 10 years. With the cost of college increasing steadily, the more savings we have, the better prepared we'll all be as parents.
What is even more encouraging is that more parents are taking advantage of dedicated college savings plans like the 529. Over those 10 years, college savings plan adoption has increased from 26% to 42%.
For those of us that have not jumped on the 529 bandwagon, let me step up to my digital debate podium for a moment and talk about the benefits of 529 college savings plans. In order to make things interesting, I will have the debate with the scary, hairy and mean … DEVIL’S ADVOCATE! Ooooooo!
Devil’s Advocate #1: Why do I need a 529? Can't I just use a savings account?
Yes, you could use a savings account, but that measly 0.1% interest you’re getting with your local bank or even the 1% you’re getting from your online bank isn’t going to cut it. College costs have climbed at a rate of 5% per year over the last 10+ years. In order to avoid your kids going into massive debt, you’ll need to amp up your annual savings rate. Taking advantage of the growth in the stock, bond and real estate markets through a state sponsored 529 can be a smart and tax efficient way to meet the college savings challenge.
Devil’s Advocate #2: Investing in the stock market is risky, bro! And I know nothing about investing. Where do I even start?
Here is an interactive map to find your state-sponsored plan. I live in Michigan, the high-five state. We’re a part of the Michigan Education Savings Program run by TIAA. They have easy to understand “Age-Based” investment options with expenses as low as 0.14%. The “Age-Based” options are a mix of options like stocks, bonds, international funds and real estate.
You can also get into US equity investing by utilizing an index fund that tracks the S&P 500. Since the S&P 500 has averaged around a 10% interest rate over it’s history, you’re sure to beat out that silly savings account! There are also other investments to look at that will diversify your portfolio and decrease your risk of loss when your little one is getting closer to attending college.
If you’re not into the simplicity of the “Age Based” set-it-and-forget-it options, I’d recommend meeting with an expert that can help you plan out your portfolio. A fee-only certified financial planner professional is the way to go in my opinion.
Devil’s Advocate #3: With skyrocketing college tuition, I’ll never be able to save up enough money for my kids. Why should I waste my time and money, Andy?
Because we’re talking about your kids possessed Devil Lady!
Yes, I agree with you that the cost of college is flippin’ nuts. Right now, to attend Michigan State University where my wife and I went (Go Green!) it costs around $100k for 4-years. If Zoey (our 5-year old) goes to MSU in 2030, it’ll be closer to $200k! Just because the cost is outrageous doesn’t mean we need to throw our hands up in the air and quit. You can start saving right now.
Getting our kids through college can be a combination of elements too. It doesn’t all have to be through your hard-earned money and 529 savings. The options are plentiful:
- Encouraging our young ones to apply for scholarships
- Part-time jobs before college and during college will not kill our kids!
- Looking into 2 years of community college and 2 years of in-state public college as an option
- Changing the way we look at gifts for our kids each year. How about a contribution to the college fund instead of another plastic toy for the birthday party?
Devil’s Advocate: Will a 529 help me with my rotting, burning flesh?
No. I would recommend going to a doctor ASAP.
However, a 529 WILL help you in setting your children up for a stress-free or stress-less future. The student loan situation in our country is a major crisis. In 2016, the average debt for students at graduation was $35,000. Imagine where it'll be in 2030!
Give your kids a chance at a debt free life. Teach them that planning and preparation equals success. Let them know that you’re putting their future and happiness as a top priority.
Good luck to all you Moms, Dads and Devils out there. Our kid’s future education is in our hands.