Hylland Capital
The next generation in financial planning
Feynman blackboard1140w.jpg

Blog

What's New At Hylland Capital?

Featured Blog Posts:

All Blog Posts:

Create a College Savings Plan in 5 Minutes With Hylland Capital

Intro GIF loop.gif

How much should you be saving each month into your child's college savings fund?

If you have no idea, you are not alone.

But it is important to find out because for most families, college represents one of their household's largest expenses. That means the combination of getting started early combined with a little bit of planning can go a long way.

We have created a video to help walk you through creating a college savings plan with our financial planning software:
This software is free to use whether you are a client of Hylland Capital Management or not, just sign up here:

http://www.hyllandcapital.com/start-financial-plan

The most common way to save for future college expenses is using a 529 savings account.

Money that is invested in a 529 account grows tax free, and can be withdrawn tax free if used for qualified education expenses. In addition, depending on which state you live in, you may get a tax deduction for contributing to a 529 plan as well!

Using a 529 college savings account, how much should you expect to save to fully cover the cost of your child's college expenses?

Estimating Future College Tuition Expenses

First, we need an estimate on what college tuition will cost in 18 years. Today, the national average for 1 year of college tuition, room and board, and other expenses is around $23,000.

But as many of us are aware, college tuition prices do not stay steady. In fact, they have been rising rapidly:

WSJ_rising_college_costs2.png

Since 1990, college tuition has increased almost 400%.

Although the previous price increases seem unsustainable, it seems unreasonable to expect costs to drop over the next few decades. We build a 5% annual tuition increase into our client's financial plans.

That means a child born in 2018 can expect college tuition to cost around $53,000!

And that is just based on the national average! Plan on your child attending Ivy League schools? Our financial planning software can pull tuition costs for almost any U.S. college or University. For example, this year's tuition for Harvard comes in around $56,000:

Harvard_tuition_costs.png

By the time your child destined for the Ivy Leagues is 18, this cost will likely be well over $100,000.

 

Estimating College Savings Growth

Next, now that we have an estimated cost, we need to factor in that our savings today will have the opportunity to grow and compound.

529 accounts are typically investing in stocks and bonds, which have historically returned between 5% and 8% (though that is no guarantee in the future!). 

With our software we can set a estimated growth rate, combined with an annual 529 account contribution, and determine how close we can get to our college savings goal:

college_savings_amounts.png

A family contributing $5,400 per year for 18 years would save a total of $97,200. But over the course of 18 years, with 6% growth that $97,200 grows to over $200,000!

This shows the power of planning. For a child born today, college can be expected to cost around $230,000 by the time they are 18 years old. But a family that begins saving now can save "just" $97,200 to cover nearly all of the projected expenses.

Much like retirement, getting started early is an incredible advantage!

 

Choosing a 529 Account and Investments

This will help you get an idea on how much to save to reach your college savings goals. But there is still more to consider.

Depending on which state you live in, you may be eligible for an income tax deduction for 529 account contributions:

 This chart is from FinAid.Org  *Update: Minnesota has since offered a tax deduction for 529 contributions. Minnesotans can now deduct up to $3,000 for a married couple filing jointly or $1,500 for all other filers for contributions made to a qualified 529 account. Or, they may opt for a non-refundable tax credit of half contributions up to $500 (based on certain income limitations).

This chart is from FinAid.Org

*Update: Minnesota has since offered a tax deduction for 529 contributions. Minnesotans can now deduct up to $3,000 for a married couple filing jointly or $1,500 for all other filers for contributions made to a qualified 529 account. Or, they may opt for a non-refundable tax credit of half contributions up to $500 (based on certain income limitations).

 

If your state offers a tax break for 529 contributions, it will likely be worth while to take advantage of the deduction.

If you are in one of the state's that do not offer a tax deduction for 529 contributions, or you are in a state with very high 529 fees, you may want to consider another state's 529 plan.

What makes one state's 529 plan better than another? First consider the 529 plan fund's fees. For example, consider California's 529 plan fees:

CA_529_plan_fees.png

And compare them to a more expensive state's 529 plan, such as Kentucky:

KY_529_plan_funds_and_fees.png

Savers in Kentucky's 529 plan may have expenses more than 10x higher than those who use California's 529 plan!

After you determine which state's plan is best for your family, your next consideration involves which funds to use.

Generally speaking, those who begin saving early for college, who have a much longer time horizon would initially invest in mostly stocks, which have a higher historical return, but higher volatility as well. Then, as college enrollment comes near, investments are transferred into
"safer" investments such as bonds.

But the best investment for you will likely vary based on the amount you are able to save, your risk tolerance, and other factors.

 

For those looking to read further into college savings, we have a 3 part series on college savings:

Other questions? Contact us today and let us help you find the best college savings plan for you: