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 Roman Kozak, vice president, senior retirement planning consultant Wealth Strategies Group at RBC Wealth Management in Minneapolis, Minn.
“Maybe they're a young couple, maybe just starting out on their career paths and a new baby arrives in the household," says Kozak. “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 plan, especially if you don't qualify for financial aid or needs-based grants. Here are some strategies for navigating the multi-kid, college crunch.
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, Paul DeLauro, senior vice president and manager of Wealth Planning at City National Bank, says he strongly encourages parents do the math themselves.
“They get the benefit of self-discovery that kicks in when they start writing it down," he says. “If they calculate the costs themselves, then they come up with a real number and they understand where it came from."
Look to your own alma matter as an example, says DeLauro. 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. Add up the posted tuition rate, the cost of room and board, books, academic fees, and any potential athletic fees or study abroad programs.
“List out everything you can contemplate based on your own background, add it up, then inflate that every year by five percent," he says. “That's going to be your number … the nest egg you're going to need when that child hits age 18 to pay for the 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 factoring in the age difference between your kids.
“And test your assumption every year," says DeLauro.
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-college expenses like room and board, books, fees and computers for use at school.
Kozak points out that 529 plans typically have a cap of $300,000 to $350,000 and are especially helpful for families who have more than one child going to college.
“If you've money left over and you've got a child who just graduated and has younger siblings, that leftover money, can be transferred or renamed to a younger sibling," he explains.
The downside, explains DeLauro, 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 $14,000 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 $28,000 per year in a tax-advantaged way. But, $28,000 is not enough to cover a beneficiary’s cost of college. Can you give more?
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 $140,000 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.
The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) can also be used for college savings. Both accounts allow grandparents or parents to make gifts to the account, and given it's in the children's name, the tax liability is often shifted to the child who is likely to sit in a lower tax bracket than the parents.
“The benefit of an UTMA account is that if monies are leftover, unlike a 529 Plan, UTMA assets can be used without tax penalties for all sorts of purposes, such as a down payment on their first home or for their wedding," he says.
The downside of an UTMA account, says DeLauro, is once that child reaches the age of majority (18 or 21 depending on the state) the money is officially theirs. “And if he or she chooses that they want the red Corvette and not the Stanford college education, they're going to go buy the red Corvette and there's nothing you can do to stop them – it's their money," he says.
Different times call for different strategies
Regardless of the vessel you use, managing multiples comes down to segregating 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.
“The investment objective for that is different than the investment objective of your own money," DeLauro says, adding that segregating it gives you a “strong visual of where you are savings-wise."
DeLauro says he typically divides the investment strategy out 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," says DeLauro. “Your investment policy and savings plan changes based on the age of the child."
“When you get into that zone for grades seven to 12 the time horizon is smaller – you can still fund a 529 and you probably should, but your investment objectives change," says DeLauro.
Once the children are close to attending college, he recommends using simple savings accounts for the funds. “The closer you are to college, the more liquid you need to be, just like retirement planning."
The sibling factor
Kozak says that while the firm’s clients and their children tend to not qualify for financial aid, he highly recommends filling 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.
“Very often you get the answer you expected – not eligible," he says. However, the Expected Family Contribution (EFC) adjusts year-to-year dependent on the number of siblings in college simultaneously which could boost a families financial aid eligibility.
With or without aid, DeLauro 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 DeLauro. “You've got to live within your means."