/cloudfront-us-east-1.images.arcpublishing.com/morningstar/I5ZBI54INNGZTM6I7PSYCXM2BY.png "Can Parents Save Too Much for Their Child’s Education?")
On this episode of The Long View, Mark Berg, the founder of and lead advisor at Timothy Financial Counsel, breaks down the different ways parents can help their kids financially without setting them up for bad financial habits.
Here are a few excerpts from Berg’s conversation with Morningstar’s Christine Benz and Amy Arnott.
How to Set Parameters With Your Children When Saving for College
Christine Benz: We wanted to talk about funding college, which is a big financial goal, obviously, in many households with children. How should that conversation go? I’ve heard that it’s a good idea for parents to set expectations about how they intend to pay for college, how much they want the child involved in paying for college. Do you think that’s a good practice to set parameters about here’s what we can do for you, here’s what we expect you to do, and so on?
Mark Berg: Absolutely. I think it’s very, very important. It’s such a significant cost investment for the family. And so, as you’re broaching that topic, we would suggest early and often from a conversation standpoint, as soon as they are able to work, and this is back to that example that I mentioned, where a certain percentage of, let’s say, earnings was set aside for their participation in schooling. So, I think there are so many things that interconnect as it relates to planning for college. So, I’ll tell you an example or two: A client that I’ve worked with for many years of modest means, and when we went through their process, we determined without sacrificing your own financial future, you could afford this amount per year. And so, what they did was they sat down with each of their kids, and they said, this is what we can afford, this is what you can count on, but everything above that, it’s on you.
And the amazing thing, and it feels near miraculous, it was not a big number that they could contribute. All three of their children graduated debt-free because they each took a different path as far as how they approached it, whether it’s two years of community college and then transfer and finish at a traditional four-year school, or graduating early, or applying for scholarships and grants. There are so many different ways that you can go about it, as well as just earning and saving, because it is a significant expense, it’s important to have those conversations set those guidelines, and stick to them.
Can Parents Save Too Much for Their Child’s Education?
Amy Arnott: So, in working with your clients, I’m wondering, do you often see people oversaving for their children’s education, or assuming that the kids are going to go to medical school or law school, something like that? I remember when I was working as a financial advisor a few years ago, that’s something that we ran into, especially with clients who were very successful themselves, who were physicians or attorneys, and had the expectation that all of their children would follow a similar path.
Berg: Yeah, it’s a great question. And the answer is, yes, in some cases, that was definitely the case. And they were planning not only for a four-year undergrad, but also for grad school, or medical school, or law school, that sort of thing. And the 529 plan is a very attractive plan because of the tax benefits associated. It’s like a Roth IRA in the sense that it grows tax-free, withdrawal tax-free. But what we typically do in our recommendations is, say, when they’re young target about 80%, about three years of a traditional school, and then we fine-tune as we get closer. But for those that, before they came to us, came with large balances, we just have to plan accordingly. One of the benefits of 529 plans is you can change the beneficiary. And so, we can even eventually go out and set money aside for future grandkids or whatever. So, there is some degree of flexibility with that.
But we would not recommend oversaving. We don’t feel like that’s the best way. The 529 set up for current schooling for a current child. And so, we try to hit it as close as we can to actual cost.
Benz: I want to ask a related question about parents’ tendency to overextend themselves with respect to college funding. So, if their retirement funds aren’t really where they should be, they might still be inclined to prioritize the college fund. Do you encounter that? And what do you say to clients who are inclined in that direction, where that’s the key priority, and you’re looking at the retirement fund, and a little bit worried that that might not be what it should be?
Berg: Yeah, it does happen from time to time. I think any parent wants what’s best, whatever they define as best for their kids in college education is often considered one of those top gifts that you can give to your children. But it has become increasingly, well, for sure, expensive and to many unaffordable. And so, yes, there sometimes is that unhealthy balance, we would say. And what we try to do is answer that question not by convincing them, but just by showing them their own numbers. And that’s with planning. I’m sure those of your listeners who do financial planning, or I’d imagine a lot of your listeners have a financial planner, can help them walk that journey of saying, OK, here is your picture excluding college—let’s layer college in, let’s layer saving for college at different levels, and what would be the impact on your financial picture. And so, oftentimes we are recommending tapping it down and setting limits, partly because when those preconversations weren’t had about college and creating boundaries with them, the decision-making for the student may be in a completely different direction. Oh, I want to go to a school on the coast, or be by the ocean, or this is a really pretty campus, or they’ve got a great Greek system or whatever. And not seeing that, well, there’s a $70,000-a-year decision associated with that. And so, they need to understand the financial part of it. And this is part of training up our kids in financial responsibility and showing our kids that we do that ourselves in big decisions like this. That’s a very important learning tool.
