OK, moms and dads, how will you pay for college for multiple children? With college costs now averaging more than $22,000 per year per child for a public in-state student and averaging more than $44,000 per year per student for private colleges, you’ll need to figure this out long before high school graduation day.
When your little cubs grow up, you’ll need to have a plan. Do you think momma bears wait until winter to comes to find food and shelter? No. And you shouldn’t either.
Saving to pay for college for multiple children is one part of that total plan. In other blog posts, I’ve also stressed that saving on the cost of college isn’t just saving for college. Saving on the cost of college can include how to structure your finances to lower your tax liabilities, reduce the interest you pay on mortgages or student loans and also on ways to lower your Expected Family Contribution to qualify for more needs-based financial aid or even scholarships.
But today, let’s focus on one aspect of college funding – the savings plan.
529 Plan Basics
While there are many vehicles to help parents save for college, the one that most financial advisors and the media tend to focus on are 529 Savings Plans. These plans offer several advantages including diversified investment management based on age-based investment allocations. The other big advantage of such college savings plans is the opportunity to grow and withdraw assets free of federal taxes when used for qualified college or post-secondary vocational education. And in some cases, parents or grandparents may also receive tax credits on their individual state income tax returns when saving for college.
Age-based investment options are ideal for account owners who are looking for a turn-key method of saving. These options are designed to change the mix of stock and bond investments held in the account based on the age of the student named as the beneficiary of the account. So for a younger child with several years from college, you’ll find the allocations more tilted toward growth stocks. As your child ages and gets closer to entering college, the investment manager will automatically readjust the mix to have more bonds or cash and less in equities so that the account value may experience fewer fluctuations based on the stock market.
One Account Per Child
But when you have more than one child, what should you do about their college savings? Should you manage everything in one account or have an account for each child?
The best course of action is to have one account set up for each child. Sure, you can use one account to save and invest for all your kids. But unless you have twins, triplets or multiples in other numbers, your kids will be attending school at different times. And the cost of college will vary and be higher for those kids who are younger simply by an inflation factor if for no other reason.
The other reason that it makes sense to split the accounts is that it may make it easier to track later on. While you may use the same state sponsored plan and even the same investments, you’ll have a way of targeting the savings for each child. And if the children are separated by a wide age difference, then it will make sense to have different investment allocations more tuned to the student’s age.
I know a colleague who had two children with his first wife. He had set up 529 plans for each of them that included an age-based option. When they were near high school age, mom passed away unfortunately. Dad remarried some time later and a baby brother was added to the mix. While he could have added the son as a beneficiary to one of the existing plans for the much older siblings, it made more sense to open up a new account with a more appropriate mix of investments with a higher stock allocation for the boy’s age. Since the siblings were in or entering college, their 529 plan had shifted over time to have a higher mix of bonds, fixed income and cash investments.
Contributions for Each: Same or Different?
Now the best advice that I can offer for college savings is the same as advice for retirement savings: save early and often. You can start savings even before you get married – you can always change and add the name and tax ID of the beneficiary after the stork arrives. But more often than not, there are other priorities for that net paycheck especially after you first get married or as the kids are born. And in these cases, I’ll always recommend saving first for your own retirement since you really can’t borrow for retirement but you can borrow to pay for college.
So, let’s say your cash flow has stabilized and you finally get around to setting up that 529 plan. (Or maybe you’re one of those who marries later in life – like me – and you weren’t expecting to have three little ones running around the house).
Now, let’s say you have three kids. For purposes of our illustration we’ll name them Spencer (age 4), Zach (age 3) and Sabrina (age 1). This means that you have about 13 years until college. In 2027/2028, we’re looking at a total cost of attendance of about $260,000 at the current public college cost inflated by 5% per year. In order to pay for 30% of the total cost (and cover the rest through loans, cash flow and scholarships or grants), we would fall short of the goal. To fix this, we would need to increase savings from $50 per month to nearly $270 per month. And that’s before adding up the numbers for the other kids.
So, we could front-load and contribute more to the eldest, do an equal split or contribute more to the youngest. What should we do?
With limited funds, parents should start something. And given the ages in this illustration, it makes sense to contribute more to the account of the oldest child. Why? Our time horizon is shorter for the eldest. The others have more time until college so we should be able to assume that they will benefit from the compounding effect of savings over the longer time horizon.
Hand-Me-Downs and Leftovers?
And remember this: Any unused funds can be transferred to the benefit of the other children later. Unused funds? Yes, because there may be scholarships or the student may have chosen a less expensive school or his parents put in place a financial plan that helped him reduce his Expected Family Contribution and score more aid.
Unlike other hand-me-downs, these will be leftovers that I’m sure the others will appreciate and certainly won’t go bad.
