Building a college savings strategy

Matt: We know college can be one of the biggest expenses a family ever takes on, and the price tag can make saving for college feel overwhelming. But you don't necessarily have to have enough money to pay for four years of school in cash.

This morning on Matt on the Money: how to build a college savings strategy without putting your own financial future at risk. You have to put your own safety mask on first.

Dan Bennett with Lakewater Advisory is back with us. Dan, I want to start with the big picture. For the parent of a young child who's watching this morning, how early should they start, and how do they figure out how much they should actually be saving?

Dan: If saving for college is important to you, then starting early will obviously benefit you over time. The earlier the better. Let compounding interest do its job.

Even if you have to start with $50 or $70 a month, do whatever you can, and then gradually increase that over time.

Matt: Would you look at that from a dollar-amount perspective or as a percentage of your income?

Dan: I think you first have to determine what you're saving for. Are you saving for private tuition or public? Are you saving for a couple of years and then they take out loans, or are you saving for four years? Are you saving for a master's?

Start with the end in mind: how many years of college do you plan to fund, and is it public or private? Then work backward and determine how much you need to start saving now to get there.

Matt: 529 plans are the most common savings tool, the one people hear about the most. How do they work, and what makes them so attractive?

Dan: A 529 is an investment plan specifically earmarked for college. Florida has its own 529 plan. Parents, grandparents, nieces, nephews, uncles, family, friends: anybody can set one up for a child as the beneficiary.

Matt: That's a tax-advantaged account, right?

Dan: It's tax-advantaged. You don't get a deduction on the contribution because we don't have a state income tax in Florida. But all of your contributions and all of the growth are completely tax-free, and when the money comes out in the future for qualified education expenses, it is 100% tax-free.

Matt: Can people from out of state contribute to a Florida 529?

Dan: They certainly can, and the student can go to an out-of-state school and still benefit from the 529 plan. If you set up a 529 in Florida and your child goes to school in Texas, New York, or California, they can still use those funds completely tax-free. There's no penalty.

Matt: Here's a dilemma I think a lot of parents face: there's only so much money left each month. If the choice is between putting money into your retirement account or your child's college fund, what comes first?

Dan: What's more important to you? At some point, if you plan to retire, you can't take out loans for retirement. You can take out loans for college if you're in that position.

You said it at the very beginning: when the oxygen masks fall on an airplane, they tell you to put yours on first. The same principle applies to retirement versus education. You cannot borrow for your retirement.

Matt: Let's talk to the parent whose child is 15 or 16. Maybe they're thinking, "I should have started 10 years ago." Is it too late for that parent, and what should the family be doing now?

Dan: They should absolutely sit down and at least speak with a college advisor, maybe someone at their school, or a financial planner or financial advisor, and determine whether there are grants available or scholarships they can qualify for.

In terms of saving for college, it depends on how much disposable income you have. The Florida Prepaid Plan is a great plan. If you decide to stay in the state of Florida, it can fund up to four years of a public school's tuition, and you can set that up all the way through 11th grade. So if they're 14 or 15, it's never too late to start, even if you only want to fund a semester or two.

Matt: So the big takeaway: you don't have to have everything funded right now. There are ways to be creative, but be thinking ahead. Quickly, the newsletter. I want to make sure people know where to find you.

Dan: Go to lakewateradvisory.com. I write a newsletter every two weeks, and we send it out to our subscribers.

Matt: This week you're talking scams and fraud, right?

Dan: Scams. Everyone's getting a million calls from scammers, so we sent one out yesterday on that and how to protect yourself.

Matt: Thanks, Dan.