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How to Start a College Savings Plan…When You Don't Know How Much College Will Cost

November 12, 2020

Back-to-school 2020 looked vastly different than years past. Coronavirus transformed in-person classes and social interactions into precarious endeavors, and some college students made a trek to their childhood bedrooms instead of cross-country to a storied dormitory. The changes started in March, of course, when college students were sent home to avoid the risks of getting or spreading the virus. Now, as college systems scramble to adapt their traditional models, “paying customers” are questioning the value of steep tuition prices. Will the downward pressure slow the historically steep increases in college costs? And how could changes affect your college savings plan?

The cost of a four-year degree is still incredibly expensive compared with other costs and greatly outpaced average increases in income over the past 20 years. U.S. News reports the average tuition and fees at ranked private colleges is $35,087 for the 2020-2021 academic year. Ranked public schools on average cost $9,687 for in-state students and $21,184 for those from out-of-state.

Colleges and universities were struggling with rising costs even before the pandemic, so it’s unlikely college tuition will decrease dramatically, even if the experience does change. We recommend acting prudently and continuing your college savings strategy based on your child’s age and your family’s economics.  

529 Plans Can be Powerful Tools

I often advise clients planning to save for college to invest money in qualified tuition plans, commonly known as 529 plans. Just as a 401(k) is a dedicated tool for the dedicated purpose of retirement, so a 529 plan is for education. The earnings grow tax-free, given the funds are used for education.

There are many state-sponsored 529 plans that offer extra tax benefits, so do your research. As with all investments, you should make sure the 529 plan has reasonable fees and that you understand how it works. Most offer a limited menu of mutual funds and exchange-traded funds.

Setting up a 529 is easy, but regularly contributing to college saving takes dedication. I think back to a conversation I had once with a colleague on a nonprofit board. He was so grateful that his 529 plan enabled his daughter to attend a private university with an annual price tag of more than $50,000.  Yet, it wasn’t the advantageous savings account that deserved so much credit. He and his family made the tough decision to forego current spending to achieve a long-term goal. 


Your Child’s Age Should Inform Your College Savings Plan

Approach college saving as you would a retirement plan. The more time you have to save will dictate how aggressive or conservative your stance. Worried that you don’t have an exact target to strive toward? We have some suggestions for that, too.  Based on your child’s age, we recommend:

Ages 0-6: You are in the sweet spot. Start a 529 plan now and treat it like a bill that you dutifully pay monthly. Target today’s costs with 2.5% annual inflation, which was the increase of education costs in 2019. With time on your side, in a few years you’ll be able to determine how much you really need to save, and course correct if necessary.

Ages 7-12: Building on the assets you have already accumulated in a college savings plan, continue to invest in a 529 plan. Pay close attention to the trends in costs for public and private schools. Inflation for higher education may rise, flatline or perhaps even decrease.

Ages 13-15: Based on what we know today, COVID should be contained by the time your child begins tackling college applications. Universities will be working on their financial models over the next few years, both to recover from the effects of the pandemic and to reset their prices based on a new understanding of what we all value from a higher education.

Continue to invest using today’s prices as a guide but consider switching to a savings account or a non-529 plan when you have funded 75% of your goal. This will give you flexibility if prices drop, as some experts are predicting. It’s important not to overfund 529 plans because withdrawals that aren’t used for education are subject to taxes and penalties.

Ages 16-18: Due to the uncertainty around the longevity of COVID, it’s too hard to predict what college will look like for your child. With so few years until you use these funds, the benefit of tax-free growth that a 529 plan provides diminishes. Consider putting the rest of your college contributions into a savings account or investment that will be liquid when it’s time to pack up for the dorm – or childhood bedroom.

Sure, there are many unknowns today about the costs of higher education. The truth? There have always been. But a smart college savings plan is one way to achieve a sense of control in these most disorienting times.


Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.