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College Planning: Where to Start

by Carl Richards
Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at BAM Advisor Services. His book, ”The Behavior Gap,” was published earlier this year. His sketches are archived here on the Bucks blog.

When I suggested a couple weeks ago that we need to talk about and plan for college sooner, one question kept coming up: how?
While the specifics of your plan will depend on you and your children, there are some basics that make sense for most everyone.

1. Where are you today?

Perhaps this one is obvious, but you need to be super clear about your current financials. It’s really hard to plan a trip if you have no idea where you’re starting. A good place to begin is to create a family balance sheet. It may seem a simple thing, but you’d be surprised how few people have one.

2. Where do you want to go?

Normally, when you decide to go on a trip, it helps to know where you want to go. But with financial goals, like saving for college, it’s rarely a straight line. Since the future is uncertain when we try to plan, and especially when we pretend we can be precise with planning, it can end in frustration. Think of all the guesses that go into a plan for reaching financial goals.

What will it actually cost?

What about inflation?

What rate of return will we earn?

How much can we save?

Then, there’s maybe the biggest unknown: where will your children want to go AND will they get accepted?
But if that seems too complicated, there’s always the approach taken by my friend Brad.

One time I asked him if he knew if he was saving enough for his daughter’s education. Did he have a plan? He said: “Hey Carl, how about this plan? I’m saving as much as I reasonably can.”

With that in mind, let’s walk through the two options.

If you need motivation to save, then it may be helpful for you to take the time to forecast (really, guess) what it will cost you to pay for college. I’ve seen motivated people suddenly find ways to save more, either by spending a bit less or earning a bit more. If you need help, there are plenty of tools. Try this total cost calculator, or if you want to get more specific in your guess, you can compare public andprivate colleges by state.

But maybe you’re more like my friend Brad: just save as much as you reasonably can. Since saving is one of the few things that may be in our control, I like this plan. Saving as much as you reasonably can may be all we can do anyway. Ultimately, it really doesn’t matter how much it will cost to send my daughter to Stanford. I can only save as much as I can, and I may not enjoy the idea of constantly reminding myself that I’m not doing enough.

What if I focused instead on the other things that matter? Things like having real conversations with my daughter about her goals and what it will take to get there. And there’s definitely value in helping her explore all the available scholarships and financial aid and what she can do to improve her chances with grades, sports and other activities.

After all, as Felix Salmon pointed out, we often don’t even know the cost until the acceptance letter arrives. In some cases, the colleges we assumed would be beyond our financial reach could end up costing slightly more than other colleges because of financial aid.

3. Where do I save the money?

It’s hard to argue against using a 529 account for at least some portion of the money you’re saving for college. There are two options available: prepaid tuition and college saving plans. Such plans can offer tax benefits. But remember that if you withdraw money from these accounts for something other than education, there may be penalties and fees. To get a sense of what’s available, here’s a tool for helping you evaluate the different 529 plans. No matter what path you select, one of the most important and valuable parts of the process might be the conversations you have with your children. Besides helping prepare them for college, you’re helping them learn how to set and achieve their financial goals. And that’s an education they can always use.