27 Nov How much should I be saving for college?

Q. Where can I open a 529 account for my son? I’m beginning to panics because he’s a sophomore in high school. How much should I be trying to save?
— Parent

A. We understand your panic. With your son so close to college, there’s not a lot of time.

If you haven’t saved anything to date, you and your son are going to have to manage your expectations.

But that doesn’t mean all is lost.

Let’s start with where you can save.

There are many providers when it comes to finding a 529 plan to set aside savings for your son’s college expenses, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

Unlike some states, New Jersey does not provide a deduction for contributions made to a 529, Mott said. That means there’s not necessarily much of an advantage to choosing the state’s 529 plan.

The state plan does offer a $1,500 “scholarship” if your son goes to a college in New Jersey, but it depends on how long you have been investing in the state plan. It doesn’t seem you have enough time to qualify for the entire amount.

Mott recommends you take a look at the website Savingforcollege.com, which provides a great deal of information about different 529 plans – including their costs and performance.

“One of the primary advantages of using a 529 account is that the assets grow on a tax-deferred basis and will continue to be tax-free when used for qualified education expenses such as tuition, room, board and books,” Mott said.

Another big plus to a 529 plan is the account’s treatment on college financial aid forms.

“The value of the account must be included as an asset, but parents are only expected to contribute up to 5.64 percent of their assets compared to 20 percent for children’s assets such as an UGMA savings account,” Mott said.

Unfortunately, it is hard to guarantee the returns for most 529 plans because they are invested in a combination of stock and bond mutual funds, Mott said. This is something you need to consider with only two years to go before your son starts school.

But you can consider an age-based fund within the 529 plan. It would become more conservative as the child gets older, but then the returns would be lower as they approach graduation, Mott said.

“This adjustment is made to reduce the risk of loss of principal should the stock market fare poorly just when the student is going to need the funds,” Mott said.

One alternative to look into for your son, given how close he is to starting college, is a stable value 529 plan, Mott said. This guarantees a rate of return net of fees and has no risk of principal loss.

“The other option would be to use a plan which invests in CDs of varying maturities to secure the value of the 529 account and receive a small amount of interest income,” she said.

How much you should be saving will depend on the type of education you are trying to fund for your son.

A four-year degree at Rutgers is $27,680 for an in-state student, Mott said. Using a 5 percent inflation rate and a similar rate of return on the 529 investment would mean you’d need to set aside about $110,000 in a lump sum to fully fund that amount. On a monthly basis, this would equate to a $3,100 deposit, Mott said.

Then there are private colleges that can top $70,000 per year for a student, Mott said.

Before creating a savings target for your son’s college education, she recommends you evaluate what your family’s expected contribution may be. This is known as the EFC and will help you understand whether you may be eligible for need-based financial aid.

There is a financial aid calculator at Savingforcollege.com that can help you determine what you might receive, or you can find similar tools – called Net Price Calculators – on every college website. These will help you see what aid your student might be eligible for at a specific university.

“If there is a possibility of receiving aid, you may be able to reduce the amount you contribute to a 529,” Mott said.

If you have some savings that can be earmarked to make a lump sum deposit, that’s great, but don’t use up all your emergency funds to accomplish this, Mott said.

“A monthly contribution should be affordable from an overall cash flow perspective and not create a shortage that prevents you from paying your bills and saving for retirement,” she said. “In the end, it’s essential to create a college savings goal that is attainable and doesn’t put your own financial future at risk.”

Remember, your son can always borrow for college, but you won’t be able to borrow for retirement.

Discuss college costs and choices with your son now so that he has some framework to guide him as he begins to consider schools, Mott said.

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