Start Saving for College the Day They Are Born

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My youngest is a first-year student at the University of Virginia. My coauthor Matthew's youngest child was born only a month ago. Matthew is just beginning to think about college funding, and I'm withdrawing from my final 529 plan.

Over their lifetime, college graduates gross $1 million more in earnings than their less educated counterparts. Education helps people both gain and keep wealth. But paying for it can be daunting, especially if you have to pay all at once. For some families the price tag exceeds the cost of their home. Thus starting a savings plan early is critical. Fortunately, compounded savings eases the financial burden.

The State Council of Higher Education for Virginia study reports that the average costs for a year at a public in-state college or university will set you back $15,642. For every dollar you spend at an in-state college, only 36 cents goes toward tuition. Room and board account for 42 cents and the extra 22 cents covers books, supplies, transportation and other costs.

Monthly Savings for University of Virginia In-State Costs
Tuition Only Total Costs
Newborn $225 $439
Grade 1 $354 $689
Grade 6 $597 $1,163
Grade 9 $1046 $2,038
Grade 11 $2,303 $4,489

Expect an average price tag of $28,832 if your child enrolls as an out-of-state student or $35,636 if he or she attends a private college. Aid from grants and tax subsidies help reduce the price about 40% on average. However, those families making over $100,000 in income should not expect much help.

Saving for college requires time and money. The more you have of each, the better. Time puts the miracle of compound interest on your side. And the more money that is earning money, the less you need to continue contributing.

There is no such thing as saving too early, even for Matthew's youngest child. Saving early can cut the cost of his college education in half. Imagine he decides to go to the University of Virginia like his parents. Currently four years of tuition costs about $47,000. But by the time Matthew's son is ready to enroll, the price tag will have risen to $98,960. The earlier Matthew and his wife begin saving, the more manageable the monthly amount that should be saved.

Saving early allows you to buy your education at a discount. After saving $225 a month for 18 years, the newborn's college savings account will have grown to $98,960. An astonishing $49,235 of that amount accrued through the magic of compound interest. The great benefit of a 529 plan is that all the growth in the account can be withdrawn tax free.

Those with the money upfront could deposit $26,500 and let compound interest generate the remaining $72,460. Buying a college education for a 73% discount while receiving several years of tax deductions is a deal those with money should not pass up!

My daughter's 529 plan was first funded at the end of 2002 and has experienced a time-weighted return of 88.3%, or 9.4% annualized, since then. Yes, it was once up 121.6%, or 17.7% annualized, but it has still earned over $30,000 and saved us a tremendous amount of money.

If you cannot invest a large sum now, save a little every day. Started young enough, even a few dollars a day will pay the tuition at many public schools. By investing in a college savings plan, your money can grow faster than the inflation rate of higher education. These costs have been rising at a rate of 5%, and over the past 10 years, tuition at public schools has gone up more than 50%. If you are not saving for college, you are falling behind.

Saving for college is a critical part of financial planning. But saving for retirement is even more essential. You can borrow money for college but not for retirement. So prioritize your savings plan based on your specific situation.

For many of our clients it is the grandparents who are secure enough financially to be able to fund their grandchildren's education. The added benefit of having a grandparent own a 529 plan is that these funds are not counted in the formula for financial aid.

Higher education is critical in uncertain economic times. Although official unemployment is more than 10%, unemployment for those with a college education is only about 5%. And for people who did not finish high school, the unemployment rate is 15.3%. These are the official rates that do not count any workers who have been unemployed awhile and presumably have given up. Jobs that do not require a college education continue to move overseas into the emerging market countries.

Virginia has two of the best 529 plans in the country. For more information on the College America and the Virginia Education Savings Trust (VEST) plans, visit www.virginia529.com . Saving for college should be part of comprehensive wealth management. Only a fiduciary has a legal obligation to sit on your side of the table and put your interests first. The National Association of Personal Financial Advisors website ( www.napfa.org ) lists fee-only advisors in your area.


Marotta Wealth Mangagement, Inc. of Charlottesville provides fee-only financial planning and asset management. Visit www.emarotta.com for more information. Questions to be answered in the column should be sent to questions@emarotta.com or Marotta Wealth Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.