Money Talks

There was a time not so long ago that I could have skipped this article, saying something like, “Investing for college is like any other long-term investment goal. You simply invest in stocks, bonds and/or money market funds like you would for retirement or anything else.”  These days, however, there are now sufficient tax advantaged scenarios and financing alternatives to necessitate a full class on the subject. This is sad for me, since I now have to write an additional chapter. But it’s good for you, because if you’ve got kids heading off to college next month or 17 years from now, you’re going to be able to save some serious money.

There was a time not so long ago that I could have skipped this article, saying something like, “Investing for college is like any other long-term investment goal. You simply invest in stocks, bonds and/or money market funds like you would for retirement or anything else.”

These days, however, there are now sufficient tax advantaged scenarios and financing alternatives to necessitate a full class on the subject. This is sad for me, since I now have to write an additional chapter. But it’s good for you, because if you’ve got kids heading off to college next month or 17 years from now, you’re going to be able to save some serious money.

The first piece of advice I have regarding finding the dough for college is this: don’t ever pay anyone to help you find the money. You don’t need to pay for financial advice and you don’t need to pay for help in finding scholarships or other sources of aid. There’s more free information on the web than you can shake a mouse at, not to mention plenty of face-to-face advice at your favorite high school or college. Besides, paying for help in this area is like paying for help with your taxes: the hardest part is filling out the forms and nobody’s going to help you with that anyway.

As you can imagine, partying nonstop for four years is an expensive proposition; especially if you spend your off hours in classrooms. And it’s getting more expensive all the time. From 1979 to 2001 tuition costs increased an average of eight percent per year, which equates to the price doubling every nine years. If the trend continues, kids born this year will require close to four times today’s prices to attend their four-year party. The good news is that in recent years, the level of tuition inflation has fallen, perhaps because colleges are pricing people out of the market and are doing what they can to control costs.

Thinking the Army doesn’t sound so bad after all? Well, take heart. It’s because college costs have mushroomed that federal and state bureaucrats have rallied around and tried to make it easier for us by coming up with things like low interest loans and special savings programs.

Before we get too far into saving for college, let’s get something out of the way. The biggest mistake you can make when it comes to saving for a college education is to be too conservative. While it’s certainly correct that this isn’t a place for rolling the dice, it’s incorrect to assume that means we should stick with ultra-conservative investments. So let’s take a quick pop quiz: Providing we have time on our side, the investment that earns the most money over time, and is therefore appropriate for college savings, is:

A. Stocks

B. Bonds or

C. Money Markets.

If you answered “A,” you get a gold star. Plus, your kids have a better chance of not having to get a scholarship, beg for loans, deal drugs or otherwise attempt to help finance their college years.

If stocks are the investment of choice for a long-term goal like retirement, it would follow that they would also be good for a long-term goal like college. But remember, since stocks fluctuate in value, they’re only appropriate when you’ve got lots of time: at least five years. So ideally, the time to start investing is the morning after conception. Also keep in mind that as your kids reach their mid to late teens, you may not like them all that much anymore, which is another reason to start when they’re cute and cuddly.

Ten years ago that’s about all there was to say about saving for college. But since then a bunch of different savings plans have popped up that are intriguing for three reasons. First, some of these things can help you save money for your kid’s education. Second, many will help you save money on your income taxes. Third, trying to understand these relatively new investment vehicles will serve as a reminder that even though you graduated from college, you’re not nearly as smart as you think you are.

Let’s start with 529 Savings Plans, then have a brief look at some other possibilities.