Saving For College for Children of US Expats
We have written a separate article explaining how expats can utilize Federal Student Aid. You can find it here: Federal Student Aid and Tax Benefits for Expats Attending Foreign Institutions
Apart from buying a home or funding one`s retirement, your children`s college education might just be the scariest and biggest expense you will ever face. The cost of college education rises every year and can currently cost over $50,000 (per year) if you`re looking at the best schools. In real numbers, the cost of sending three students for four years (and most degrees take longer these days) can easily exceed $600,000. And that`s just the cost today! If you have young children, you should consider that the inflation rate on a college education is much higher that of the normal rate of inflation. Instead of preparing your children for lives of menial labor, here are a few steps you can take, as an expat, to start saving for college today.
Start from...or Before Day One
If you are preparing for your children`s college education before having kids, you are vastly ahead of the game. It is wise to begin saving for your child`s education the day he or she is born (if not before). $200 a month for 18 years (earning the average 6%) will grow to $77,471. If you wait to save until your child is five years old (still so young, right?!) your savings (the same amount per month under the same interest rate) will only grow to $47,089 by his eighteenth birthday. $200 may seem like a large amount, but simply consider sacrificing the cost of a few evenings out or even daily luxuries (like coffee house coffee).
To Save is Better than to Borrow
Loans are a common way for students and parents to pay for college. However, consider the interest we mentioned above. Wouldn`t you rather accrue that in savings rather than in debt? Again, maybe it will inspire your savings vision if we break down the concept into real numbers. If you know you are going to need $100,000 in ten years, you can take advantage of 6% accrued interest and set aside $7,587 per year. If, on the other hand, you fail to save and are forced to borrow the full $100,000, repayment (also at 6% interest) will cost you $13,587 per year for ten years. Yikes, that`s quite a difference! Save now, or pay close to double later.
Separate Savings Accounts
Many people are tempted to combine their college and retirement savings accounts. There are numerous reasons to avoid this, however. The financial aspects of these accounts are simply not the same. When saving for college, it is rare to have more than eighteen years to plan. And, realistically, you may not start planning until your kids begin choosing between colleges. You know, almost exactly, the amount needed and you will use up the entire saved amount over the course of four or five years (maybe more if you are saving for multiple children). When saving for retirement, you should have twenty years (or more) to plan. And the money saved will mostly likely be used over many years. In fact, the goal is never to run out but to have money leftover to leave to your children and grandchildren. Because the accumulation periods and distribution requirements vary, the investment portfolios will as well.
Also, separating these accounts makes good sense because you won`t have to worry about choosing one need over the other. The designation will have already been made. It`s contrary to the way many parents think, but a child`s college education should never be funded before or over retirement. There are loans and grants and scholarships available for college expenses. No such benefits exist for retirement funding.
Spreading and Matching Currencies
Children of American expatriates are some of the luckiest in the word. Their education is enriched by their travel and exposure to the world. And, in addition to this, they`re not as limited to U.S. universities as state-side students tend to be. Expat kids truly view the world as their oyster. This is wonderful, but it does make saving that much more complicated. No currency is immune to the volatility of recent years. What happens if you have saved your hard earned U.S. dollars only to have them fall against the AUD just as your daughter makes plans to attend school in Australia? While your children are young (if they are still young), it is wise to spread your investment portfolio over various developed currencies. As your child nears college age, however, you should narrow your investments to the currency of your chosen university.
Eliminating Risk as Your Children Near College Age
College funds do not usually have years and years to weather the storm of an unpredictable market. And when the fund has matured, it will be used almost at once (unlike a retirement fund). College funds are short lived and specific. As the date for which you started your college savings fund draws closer, it will be wise to limit and eliminate as many risky investments as possible. All the more reason to begin investing early on! Once your child is in high school, the majority of the portfolio should be lower risk fixed return in the currency of your child`s chosen institution. Remember that no matter how much you could earn through a high risk investment, you could also lose the same amount. Don`t risk robbing your child of an education due to high risk investments.
There are expats who save by means of "offshore" accounts that are not taxed by their home country or their country of residence. Americans and expats whose country of residence tax worldwide income, however, cannot use this method to save. Many countries do offer tax-exempt savings accounts to be used for education. When these are offered, the savings is significant. Using our earlier example, saving $200 per months for eighteen years amounts to $77,471. If this amount was taxed at 3% (which is standard for expats), the savings would drop by $11,309. If tax free vehicles are provided, they should most definitely be taken advantage of. There are still other options for expats whose investments are taxed. A 529 College Savings Plan is a superior option. For all of your options, contact an international taxes professional.
Supplement Savings with Scholarships, Grants, and Work Study
The very good news is that it is unlikely that you will need to have the full amount of tuition saved. Most students do not pay full tuition. In fact:
- 81.7% of those attending four-year private colleges/universities receive financial aid.
- 71.9% of those attending four-year public universities/colleges receive financial aid.
- For students attending college full time, the average amount of aid received is currently $12,700.
- Despite the hype, only 5% of students attend the most expensive schools. The average cost per year for an in-state, four-year public university is $16,140 or $36,993 for a four-year private university.
Most students do not receive a "free ride," and you will most likely need to have money saved for education. But you will probably not need $600,000 to send your three kids to school. In addition to scholarships, colleges and governments both offer grants, and most schools offer work-study programs. If your child is attending a pricey university on merit, it is not uncommon for these university to offer very generous financial aid packages.
Save early, save wisely. And, equally importantly, encourage your high-schoolers to take their grades and extra curricular activities seriously. Where you fall hort on the savings end, explore the many programs that exist to help your child get the best education possible.
I.J. Zemelman, EA is the founder of Taxes for Expats