Ask a CFP® Professional
Freeman Jelks, CFP®
Certified Financial Planner
FNJ 3, LLC
Alexandria, VA

Question:

“I have two daughters (ages 5 and 7), and I want to start saving for their college educations.

I had started saving for their college expenses in the past, but had to stop after losing my job.  I am hoping to start saving again, but I would like to know:

a) How much I should save, and
b) Should I save in one college fund, or should I diversify with multiple investment vehicles?”  

-DC Saver Marcel

Answer:
 
The short answer is: “It depends”.  It depends how much college will cost, how much you have saved so far, and what kind of investment return you expect (see below).

Additionally, I applaud your good intentions, but I would recommend that you wait until you have resumed employment and saved six months worth of living expenses before you continue saving for your daughters’ college education.

This is because, once you start saving for college expenses in special college savings accounts, any withdrawals from those accounts involve significant tax penalties. And, if you were to lose your job again, or if "unexpected emergencies" occur (the water heater needs to be replaced, or your car's transmission dies, etc.) just when you begin to accumulate some significant college savings, you would have to withdraw from the college savings account and take large penalties unless you had some cash savings available.

Finally, if you have not done so already, I would recommend starting a retirement savings plan before starting your college savings account.  Although your children's education expenses are likely to occur first, you should begin saving now for your own retirement.

While it's possible for your daughters to get scholarships and/or student loans for college, you will not have that option for retirement, and most parents don't want to be a financial burden to their kids in their old age.

College Costs
Getting back to your original question, according to the College Board's Trends in College Pricing, the 2007-2008 average total costs for one year of college (including tuition, fees, room & board, books and supplies) were:

$13,126	for students attending two-year public colleges
$17,336	for in-state students attending four-year public colleges
$27,791	for out of state students attending public colleges
$35,374	for students at four-year private colleges.

Also, keep in mind that college costs have recently been increasing at about twice the inflation rate. Current tuition increases have averaged 6 to 7% per year.

How Much to Save?
Here is a link to a college savings calculator, which will tell you how much you would need to save per month or year to meet your daughters’ full college expenses:  http://www.resultsimperative.com/hosted/mf_csc.html

Keep in mind that your daughters may be able to apply for financial aid and/or students loans, but any money that you have saved by the time they go to college will help.

Saving in Multiple Accounts?
As for whether you should utilize more than one investment vehicle, I don't think so.  Although you could choose from a number of college savings vehicles, 529 plans are usually the best choice since they allow for any/all earnings to be 100% tax-free as long as the money is used for education expenses.

There are more than 50 different 529 plans (at least 1 for each state & DC) to choose from, and most offer a wide range of investment choices, ranging from conservative (all bonds) to aggressive (all stocks).  While I don’t recommend opening more than one 529 plan, you can participate in more than one investment within each child's 529 plan if you want to diversify.

Each state's 529 plan is a little different, but most are open to anyone, regardless of where the student ends up attending college.  However, there may be a state income tax deduction available to savers who invest in their own home state's plan.

In DC’s 529 plan, for example, DC residents can take up to $4,000 per year as a tax deduction when they invest in a DC College Savings Plan.   More information about DC’s 529 plan is available at http://www.dccollegesavings.com/.

More Information about 529 Plans
To compare different 529 plans, visit http://www.savingforcollege.com/college_savings_201/.

Also, if you want to read more about 529 plans and other college savings accounts, see the March “Ask a CFP® Professional” column here: http://www.dcsaves.org/resources/March09/AskACFP.asp
 
Thanks for your question, and good luck!

-Freeman Jelks, CFP®