Managing multiples: College financing strategies for more than one child

When your kids are young, college feels like an abstract, far-off endeavor, but ask any parent who has put multiple children through higher education and they’re likely to repeat the same mantra: Start early.

It sounds simple, yet it’s something many parents neglect, says Griffin Geisler, a wealth strategist at RBC Wealth Management–U.S. 

“Maybe they’re a young couple just starting out on their career paths and a new baby arrives in the household,” says Geisler. “Even if it’s very modest amount, start saving immediately. Go and open up an account.”

The cornerstone of funding your children’s education is a well-thought-out plan, especially if you don’t qualify for financial aid or needs-based grants. Here are some strategies to help you figure out how to pay for some (or all) of your kids’ college-related fees.

Do the math up front

While there’s no shortage of websites out there giving the average costs of tuition or estimating peripheral fees for sending a kid to college, Geisler says he strongly encourages parents do the math themselves.

“If they calculate the costs themselves, then they come up with a real number and understand where it came from,” he says.

Family history can be a good compass for the sort of education your children may pursue down the road, especially if it’s a private institution or an Ivy League school. You can look to your alma mater as an example—add up the posted tuition rate, cost of room and board, books, academic fees and any potential athletic fees or study abroad programs.

“List out everything you can based on your own background, add it up, then inflate that every year by five percent,” Geisler says. “That’s going to be your number—the nest egg you’ll need when that child hits age 18 to pay for four years of college.”

It also allows you to account for the difference in price each child may experience as they enter their college years, which will better prepare you for what that financial picture may look like factoring in the age difference between your kids.

The 529

The 529 plan is perhaps the most common college savings tool in the U.S. Contributions are not deductible, and earnings in a 529 plan are able to grow tax free, with no federal taxes when taken out to pay for college or qualified expenses like room and board, books, fees and computers for use at school.

Geisler points out that 529 plans typically have a cap of $300,000 to $550,000 and are especially helpful for families who have more than one child going to college.

“If you have money left over when your child graduates, that leftover money can be transferred or renamed to a younger sibling,” he explains.

The downside, adds Geisler, is the 529 eats into a person’s annual gift tax exclusion planning.

“If you are someone who is facing a looming estate tax, you may want to use your available gift tax exclusion in a way other than funding a 529 plan,” he says. This is because paying tuition is not deemed a taxable gift. Higher-income families capable of covering college through cash flow may want to avoid biting into their gift tax exclusion and use it for something more strategic, like gifting shares of the family business or interests in property that will appreciate in value.

Grandparents often want to fund a grandchild’s 529 plan all at once, but they need to be mindful of taxation around such a gift. Gifts to a 529 plan trigger the federal gift tax rules. Those rules state you can only give up to $18,000 per person per year (this is called the annual gift tax exclusion).

Married couples can double that gift, meaning a single 529 plan beneficiary can be gifted up to $36,000 per year in a tax-advantaged way. If you want to give more than $36,000, there is a provision in the tax code that lets donors fund a beneficiary’s 529 plan with up to five years of annual gift tax exclusion gifts up front. That means a married couple could gift up to $180,000 for one beneficiary’s 529 plan. For most colleges, this covers the entire cost. But, it also means that the donors can’t make other gifts to that same beneficiary until the five-year period is up.

Different times call for different strategies

Regardless of the vessel you use, college planning for multiples comes down to separating the money for each child to use further down the road and developing a strategy in tune with when you’ll need to tap into those funds.

Geisler says he typically divides the investment strategy into three categories: kindergarten to grade six, grade six to college and the college years.

“Those three time frames come with different strategies and priorities,” he explains. “Your investment policy and savings plan changes based on the age of the child.”

For example, when your child is in grades six through 12, the time horizon is smaller. You can still fund a 529 plan, Geisler says, and you probably should, but your investment objectives have changed at that point.

Once the children are close to attending college, Geisler recommends using simple savings accounts for the funds. “The closer your kids are to college, the more liquid you need to be—just like retirement planning.”

The sibling factor

Even if you don’t think you and your children will qualify for financial aid, it’s recommended to fill out the Free Application for Federal Student Aid (FAFSA) nonetheless. The form is due in January of the student’s senior year in high school.

With or without aid, Geisler says it’s the parents’ responsibility to sit down with their kids and talk about what their contribution will look like and what the true cost will be—including how much it will cost if they want to study out-of-state or abroad. Managing multiple kids in college and juggling those costs also means managing expectations.

“They’re teaching the children something very valuable,” says Geisler. “You’ve got to live within your means.”