The beginning of a new school year is a good time to think about planning ahead for the costs of college for your children. Five key variables to consider in your analysis are time horizon, cost assumptions, available resources, account structure, and investment strategy. This article addresses the first three of these variables.
The first key variable, time horizon, can be broken down into two subcomponents. These are the number of years until college begins and the number of years in school. Additional consideration should be given to whether or not you plan to continue to add to college savings during the years the child is actually attends college. Alternatively you could plan to have college costs 100% funded by the time college starts, and therefore not have to contribute additional resources during the college years.
The second variable, cost assumptions, also has two subcomponents. The first would be the annual cost of college in today’s dollars for room, board and tuition. Further consideration can also be made for various types of colleges that your child plans to attend. In other words you could run multiple scenarios for each child depending on the type school ranging from commuting to a local community college up to attending an elite college like a Johns Hopkins or a Harvard.
The third variable is funding. There are two funding factors to consider. The first is “what funds are available now that are specifically designated, or have flexibility to be used for college?” The second factor is potential sources of additional funding. Additional funding can come from a variety of resources including, but not limited to, surplus household cash flow, funds contributed by grandparents or other family members on behalf of your child, funds redirected from a child’s UGMA or UTMA custodial account, and even Section 529 Education Savings funds transferred from another family member. There are tricky issues to be carefully considered before redirecting or transferring any existing funds. Once the key variables have been identified, it is possible to run financial projections on what the approximate cost of college might reasonably be expected to be for each scenario you would like to consider.
Account Structure and Investment Strategy
The final two variables involve how and where the education funds will be accumulated and the investment strategy. These variables will be addressed in a future column.