How to Stay Flexible in Saving for Your Child's Future
The college experience and career world are changing, offering parents and students alike new options to make it work.
The post-high school norm for millennials and their predecessors was to get accepted to a four-year college, physically move there, pay for books, pay for room and board, complete a degree program and get a job. Can’t immediately come up with the $200,000+ all of that requires? Take out some loans.
Signs of that norm cracking, or at least twisting into a new shape, are becoming more and more clear. Prompted by fears of a student debt crisis — and with fresh examples in their loan-laden forebears — new college-age students are increasingly turning to alternatives to the established paradigm in order to build a debt-free future.
A recent survey by TD Ameritrade made headlines with its finding that 1 in 5 young Americans (Generation Z, defined by the researchers as ages 15-21, and young millennials, ages 22-28) may opt out of college. A deeper look shows that much of what drives that thinking is the price and debt that come with it.
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Notably, student debt is leading to roadblocks to achieving major milestones of financial freedom. Of the young millennials surveyed, 47% said they delayed buying a home because of what they owe, 40% delayed saving for retirement, and 31% delayed moving out of their parents’ home. Even 28% of parents said they pushed back saving for their own retirement to pay for their children’s education.
The cost – and value – of college is changing
The modern world’s opportunities could have a major impact on this trend in the years to come, however. Online courses are far more common than they were even 10 years ago, costly textbooks are available as eBooks, and even having an alma mater in general has less value in industries that value skills over degrees.
In a previous article, we looked at the 529 college savings plan and alternatives families might consider when saving for a child’s education. Broadening that, we find there are more ways to prepare for a child’s future than simply saving for a fill-in-the-blank university they may not even attend.
It comes down to being flexible. Paraphrasing the old saying, even the best laid plans tend to go astray. Saving for a child’s future in 2020 looks different than when today’s 18-year-olds were first born, and surely, that will be the case when today’s newborns are leaving the nest. The key for parents trying to give them a leg up is to learn how to adapt to the changing times.
Flexibility as parents
From a financial planning standpoint, preparing for a child isn’t always easy, as joyous as the occasion is. You take a newborn home and the list of expenses expands exponentially: furnishing a nursey, piecing together a wardrobe (that the baby quickly outgrows) and buying diapers — lots of diapers.
Unexpected expenses might arise, too. Let’s say the best or closest daycare in a couple’s area is outside of their budget. They may do the math and decide it’s easier, financially, for one of the parents to stop working or go to a reduced schedule, rather than pay for 40 hours of daycare a week.
In a change from the world of even a decade ago, however, staying at home doesn’t have to significantly disrupt a career or a couple’s finances. Now that people can access work servers remotely, videoconference easily and message co-workers instantly, many workplaces are letting employees work from home.
The advent of the gig economy and digitally enabled side hustles, too, gives people more flexibility to maintain their financial goals while preserving their personal lives. People can manage businesses online, such as a digital storefront, for example.
Ultimately, it means sudden changes in a family’s life circumstances — like the birth of a child that may have been a surprise, or a parent’s loss of a job — don’t have to alter plans for saving. Parents can adapt in new ways.
Flexibility as savers
When we think of flexibility, particularly in saving for a child’s education, that’s actually one of the major benefits of a 529 plan. While people are penalized when they make a withdrawal that isn’t for a qualified education expense, the penalties aren’t as bad as many think. Federal income tax is imposed on the plan’s growth, plus a 10% penalty on the growth, so depending on the amount withdrawn, the penalty may be negligible.
Still, the tax penalties bug parents enough that even when their goal is to save for their child’s education, they want to spread their savings into multiple accounts. This has some clear advantages, too, if the child ends up not attending college after high school. Fortunately, there are plenty of options to account for both possibilities.
- Other investment accounts: Creating an investment account with money earmarked for a child gives parents complete flexibility in how the money is used. The money can be used for expenses unrelated to education, making it malleable to the child’s changing plans, albeit with the downside of not having the tax benefits of the 529 plan (tax deferral and potential tax-free growth).
- Trusts: Taxed similarly to other non-529 investment accounts, trusts give parents complete control over the fund. Most importantly, parents can give direction to a trustor on just how the trust can be used. Perhaps it’s solely for education or seed money to start a business.
- Custodial accounts: These accounts are managed by a guardian (or custodian) until the child reaches the age of maturity, which differs depending on the state. In Pennsylvania, for example, once the child turns 18, they have full access to the funds. While they are simpler to set up than a trust and have great flexibility, these accounts may not be something parents are comfortable with. If a custodial account with $200,000 is suddenly available to recent high school grad, there’s no guarantee they’ll make the best decisions.
Mapping out how much they can save for their children’s future and what vehicles they’ll use to do so can be a confusing process for parents. There are advantages and disadvantages to all types of savings accounts, so it’s a plan parents should begin developing with their financial adviser even before their child is born.
Flexibility as students
As recently as 10 years ago, it felt as if high school graduates had a binary choice: Go to a four-year college or go into a field that involves physical labor. The decision was, and is, far more nuanced than that, of course, but young people’s options to build a career today are expanding rapidly.
As has been the theme of the 21st century, the digital world changes everything. Online courses are far more common today, and stay-at-home students can receive the same degree as someone on campus. Going that route, they avoid the major costs of room and board. Even more aspects of the college experience are digital now, including expensive textbooks that are cheaper online. These are benefits even on-campus students can enjoy.
Looking beyond college, more employers today also offer education assistance for employees seeking master’s degrees or entering other advanced programs. This method may even be preferable, since a master’s may not help someone as much if they have no relevant work experience.
Skipping out of the full college experience has some drawbacks. People make lifelong connections in college, be it through friends or fellow alumni who assist with networking later in life, and it’s a great opportunity to leave home but remain in a (somewhat) structured environment.
As the trends show, however, a growing number of young people aren’t necessarily interested in pursuing a bachelor's degree. They’re interested in seeking challenges and building a life — just not drowning in debt. Be it parents or their children, a full understanding of financial options will make those challenges easier to surmount and a life simpler to build — until the norms inevitably change again.
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Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.