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Got Kids Going to College Someday? What You Don’t Know Can Hurt You.

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laura-bruceI have 2 kids and I really, really want them to go to college. Part of the challenge I face, like most parents, is how do I pay for it? I have come to realize that even if you have employed the discipline of savings, there are other factors that can derail the success of reaching the goals you have lined out for your kids’ college account.

One of those things that can go wrong is inflation. The reality is that different expenditures have different inflation rates. For example, anyone who is buying insurance knows that medical premiums go up faster than the cost of a loaf of bread. Therefore, when we are doing a long-term retirement plan we have to plan separately for these costs. Otherwise, down the road the money we earmarked for the essentials will have to be diverted to buy health care. Such is the case for education, especially in Alaska.

A September 15, 2016 article in the Juneau Empire, reports University of Alaska tuition could go up 10 percent next fall. As our state heavily subsidizes the tuition for in-state students, this is the inevitable fall out of a smaller state budget. This coupled with APCM and most investment analysts agree that we should expect muted stock and bond market performance over the near term based on external forces from the market.

So, higher tuition and lower returns on the money we save, what’s a person to do? There is something that can be done. First, save early and often. Even if rates are lower than historical averages, the compounding effect of saving early should not be discounted. Second, where you save has just gotten more important. The State of Alaska has approved T. Rowe Price as our 529 provider. (More on 529’s from Kim Butler here.) It’s a great lower cost choice. But here is where parents get confused, T. Rowe Price offers 14 different portfolios for you to choose from. Let me break it down. 8 of them are in Age based or what they call Enrollment based portfolios. The younger the student you are saving for, the more aggressive the investment allocation and it automatically grows more conservative as your student gets closer to using the money. 5 of them are static portfolios, if you are a self-investor or have particular conviction to a strategy you may want to pick one of these. If you are worried (and you should be) about the inflation of tuition in Alaska, then their last portfolio called the ACT portfolio may be for you.

The ACT portfolio is another one of those static portfolio with a mix of roughly 60% fixed income and 40% stock. The downside, depending on your kid’s age, is that this is a fairly conservative portfolio for those who are younger. It has the same benefits as the other portfolios in the 529; use this balance for qualifying expenses, pay no tax on the gain if all the rules are followed. It has one added advantage that for Alaskans may be very meaningful. It has the Tuition-Value Guarantee.

Our ACT Portfolio offers our Tuition-Value Guarantee, which allows you to purchase UA tuition credits now for future use. Your portfolio contributions are tracked and reported to you in both their monetary and corresponding UA tuition credit values. With this guarantee, you do not need to face the uncertainty of predicting future UA tuition, and it ensures your child’s tuition costs will be covered regardless of future tuition increases. If your child attends a school other than UA, you can still take advantage of the full monetary value of your account.

Depending on the inflation rate of an Alaskan education this could be a substantial advantage. Now remember, the 529 can be used for other things like housing, books, etc. It’s important to note that the Tuition-Value Guarantee will not help you keep up with the inflation in those categories, for that you may want to look at their other 13 portfolios.

So what you don’t know, can affect how much education can be purchased. If you are like me and want to fund your kid’s education; having a plan, starting early and putting your savings dollars in the right places can have a huge impact. Our 4 CFP’s create thoughtful strategies for parents every year, we can help.

 

Laura Bruce, ChFC®, CFP®
Director, APCM Wealth Management for Individuals

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