Saving for College? Be Ready for the Inevitable
by David Jester, CSRIC
As a former teacher, I’m convinced that I always learned more from my students than they ever did from me. In fact, in my current world, I’m amazed at how much crossover exists. I find myself leaning on lessons taught to me by my students all the time.
One such lesson was learned at a middle school lunch table. As a teacher, I would often take a seat at lunch with different kids to check-in on their lives beyond English class and get to know them a little better. I remember one such encounter taking place with a sixth-grade girl, we’ll call her Abby.
Abby was sitting alone that day (not typical) and had a very dour expression on her face. She had one of those stainless-steel bento-box style lunch boxes. Hers, in particular, looked like it had fallen right off the page from some professional parenting magazine. Celery stalks were cut perfectly and placed just so inside their compartment, next to some type of wrap, prepared with equal attention to detail.
I asked her how things were going. Her response was refreshingly honest—though also worrying. Abby indicated that she was “super stressed out.” She had too much going on. She didn’t know what to do.
Abby was overwhelmed.
As I dug in a little more, she revealed that her life felt too busy. She was inundated with assignments for school, sports, and clubs. When I asked about those specifics, she bombarded me with a litany of calendar appointments that would be daunting to most adults.
When I asked her which of her extra-curricular activities she loved most—the answers flew off her tongue and were reflected in smiles on her face. She loved dance, and creative writing, and running.
However, when I asked her if there was something she didn’t love—that answer was easy—and the dark expressions returned…”karate.” Turned out, this was a huge commitment—every day after school with tournaments on the weekends—and Abby really didn’t love it.
Naturally, I asked if she could not do karate—or maybe not as much. She responded that this was not an option. It might hurt her chances of getting into the college she wanted to go to. Apparently, admissions committees really love a black belt. As a reminder, at this time Abby was 11. And, sadly, there is a lot of truth in what she reported. College admissions, as we all know, can be grueling and unfair.
I had the great fortune of teaching Abby two more times as a 9th grader, and then again as a junior in high school—where the rubber hits the road in the college decision process. I never forgot her comments from middle school. And, academically, Abby’s fortunes had not changed too much. She continued to be a very bright hard-working student. However, she had also changed a good bit. It was no longer some distant Ivy-League education that appealed to her. She had laid off the Harry Potter by that time. As a junior, she had landed on a (still competitive) program at a state school that was aligned with her long-term career goals.
And while there is much to glean from Abby’s lessons to me, for today’s purposes I will focus on how it relates to college planning. We work with many parents and grandparents who are saving for educational expenses to come. The majority of them utilize a 529 plan. 529 plans can be a wonderful tool for saving towards educational expenses. They offer the potential of tax-free growth of investments with the caveat that withdrawals are used to pay for educational expenses. Think IRA for college or graduate school. As an added benefit, you can now use up to $10,000 annually from a 529 plan to fund private school education K-12.
However, one of the issues that Abby’s story reflects is that…as we know, things change. When you don’t meet the criteria for withdrawals from a 529 plan, or over fund one beyond what is needed, you are left with the options of changing the beneficiary to another student, or paying taxes and a 10% penalty on your withdrawals. In other words, we encourage our clients not to overfund their college savings in a 529.
Things change and because of this it may be worth your while to consider a more flexible vehicle for a portion of your college savings.
According to the College Foundation of North Carolina*, projections right now indicate that a kindergartner who attends a top-tier private school for 4 years could be paying somewhere in the ballpark of $450,000 for their education.
If that same child chooses a public school in North Carolina, you can reduce that to the still staggering estimate of $150,000 or so.
Evidently, these two different options would require very different plans. Our advice, keep the lines of communication open, be flexible, seek guidance, and be ready for the constant inevitable—change.
As a reminder, spend wisely & invest in good.
Until next time,
Investors should consider the investment objectives, risks, charges and expenses associated with a 529 Plan before investing. This and other information is available in a Plan’s official statement. The official statement should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that provides tax and other benefits such as financial aid, scholarships and creditor protection that are not available through an out-of-state plan. Before investing in any state’s 529 plan, you should consult your tax advisor.