Thinking about paying for your kid’s college probably started eating away at your hairline the second you learned an expensive little progeny with your name on it had assumed the fetal position. If you haven’t started saving yet, don’t worry, there’s plenty of–actually, maybe worry a little bit. New York Times financial columnist Ron Lieber says you should begin saving for your kid’s college, like, yesterday.
“The more time the money has to grow, the more time the money has to grow,” says Lieber, using a bit of logic jiu jitsu even a UFC champion would admire. Given that Lieber’s columns about student loans won the Loeb Award, business journalism’s highest honor, you can assume he knows what he’s talking about.
“The power of compound interest can work in your favor if you catch a couple of bull markets along the way, so the sooner the better.” Here’s how he advises you do it.
Lieber stresses that everyone’s financial situation is different, so blanket advice in the area is hard to give. However, most financial advisers recommend parents worry about retirement savings before funding their kids’ college for the following reasons:
- Establishing your own financial security is actually the better gift to your child, who will have to support your useless old ass otherwise.
- Your kid will have many options to pay for college; you won’t for retirement.
- If your retirement savings goes really well, you’ll help your kid pay off their loans anyway.
The old adage that “your kid can get a loan for college but you can’t for retirement” isn’t technically true for homeowners, who can achieve that purpose with a reverse mortgage. Basically, this is when the Federal Housing Administration gradually pays seniors over age 62 for their homes until the homeowner returns the loan or forfeits the house, and repayment isn’t due until six months after the homeowner dies or moves away.
“If you think you’ll have your mortgage paid off by the time you’re 60 or 70, you absolutely can use a reverse mortgage to fund your retirement,” Lieber says.
“That may be a more reasonable approach than saddling yourself with debt for your child’s education, or having the kid borrow $50-, $60-, or $70,000 in order to fund their dream school.”
Lieber strongly recommends a 529 plan for most parents, primarily because the tax breaks are unparalleled.
“In 37 states, you get a state tax deduction right up front just for putting your money in there,” he says. “On the federal side, the money you put in there grows tax-free the whole time it’s in there.” He recommends checking savingforcollege.com, which provides an intricate breakdown for each of the many 529s offered across the country, most of which are available to you. The site makes a persuasive case for putting your money in one of these, based on benefits like:
- You control the account, no matter how much your kid insists they should be able to.
- Most 529s can deduct straight from your bank account into a professionally managed investment fund.
- You don’t have to report contributions on federal tax returns.
- You can change investments twice per year and roll over funds to another 529 plan once a year.
- Everyone is eligible.
It’s helpful to form a general picture of your kid’s path in life as soon as possible, because there are instances when all that money you saved in a 529 can’t go toward your kid’s tuition:
- If they get a full scholarship
- If they attend a military service academy on government funds
- If they don’t pursue higher education at all
- If this search engine does not recognize their school of choice
Though it’s important to assess obstacles a few years before your kid hits college, Lieber urges parents of young children not to let the risk of obstacles deter them from 529s: “The potential advantages so far outweigh those limited risks that I’m not sure they amount to a reason to avoid the plan.”
Plus . . .
529s apply not only to traditional four-year universities but also to community colleges and other forms of post-secondary education like vocational schools, so ineligibility is pretty unlikely.
Whether your kid wants to be a pilot, hairdresser, chef, or mortician, there’s a 529-accredited school for that. But if they can’t find a way to use the funds, consider the following:
- You can change the beneficiary to your other kid, yourself, or any relative–even your new grandkid (congratulations!).
- Withdrawing the money for non-education purposes incurs a 10% fine on the account’s earnings only, so your deposits remain untouched. After 15–20 years of letting your 529 ripen, you’re probably still coming away with a notable profit.
- If your kid gets a full scholarship or gets into West Point, you will be able to get partial or complete exemption from the non-education withdrawal tax, depending on your plan.
“I would advise the average parent to save as much as they reasonably can, and that definition is going to change,” Lieber says, borrowing the sage advice of Utah financial planner Carl Richards.
But for many parents, one-third of your kid’s estimated college costs qualifies as a reasonable 18-year goal. That’s why Lieber is also a fan of Wisconsin financial planner Kevin McKinley’s “⅓ ⅓ ⅓ Rule”: “The thought being [to] save a third [of how much you think your kid’s college will cost], spend a third during the half decade your kid is in college, and then borrow a third, with the borrowings being split in half between the student and the parents,” Lieber says.
Just like your adorable little snowflake, everyone’s financial situation is unique, so there’s no substitute for talking to a financial adviser personally to assess your situation. But as they say in the military, “A bad plan is better than no plan,” so do something, anything, as soon as possible.
If you opt for no plan, at least give your kid a heads up so they know they’ll have to earn a full ride (competitive video gaming could be an NCAA sport by then, right?). If you follow Lieber’s advice and have everything under control, maybe lie to your kid so they’ll earn that full ride anyway.
This article originally appeared on Fatherly and is reprinted with permission.