What is the best amount to save for college?
NEW YORK (Reuters) - College savings expert Joe Hurley thinks that $250 a month is the optimal amount to contribute to a child's 529 plan.
Mark Kantrowitz, a college guru at the Edvisors.com website, leans toward a one-third approach - as in, one-third of your child's tuition should come out of your savings, one-third from current income and one-third from loans.
What is the right amount for you? It's just about anyone's guess.
Since 529 plans started nationally in 1996, U.S. families have been paying more attention to saving for college. Assets in tax-advantaged 529 accounts are growing - now at more than $180 billion in assets, according to Financial Research Corp. But that is a drop in the bucket compared with the $1 trillion student loan market.
At T. Rowe Price, a large purveyor of 529 plans, the company's senior financial planner, Stuart Ritter, is searching for ways to motivate people to save for college regularly. "We, as human beings, are hard-wired to look for anchors, and we are looking for ways to give people a reasonable anchor - not the right number, but a reasonable number," he says.
Ritter is using behavioral finance - a psychology-based study of financial decisions - as a guide. This field of research drastically reshaped the world of retirement savings - automatic 401(k) enrollment helped boost participation in retirement plans to about 76 percent in 2012, according to Vanguard's latest How America Saves report. But so far, similar methods have not been used to augment college accounts.
We asked three behavioral finance experts how to kick-start families into saving more for college. Here is what they said:
MAKE A GRID
A big hurdle to college savings is that it requires families to actively open an account, according to David Laibson, a professor of economics at Harvard University.
If money earmarked for college is not in a separate account, it gets spent well before college tuition bills loom.
"The smallest logistical hurdles can make a huge difference," Laibson says. "Psychologically, putting money in something like a 529 plan is better than just putting it in a checking account and hoping you will have the strength not to spend it over 18 years."
An even more complicated factor is deciding on the amount. To simplify the process, Laibson suggests making a grid to determine what the college burden will be in relation to income, rather than using a more complicated calculator.
He recommends reducing the parameters to a tiny chart, so that you may view your income bracket on one axis and the estimated college cost for the type of institutions on the other. Then you can quickly see how much you will likely need to put away to hit that number.
GOLD, SILVER, BRONZE
Taking a page from health insurance reform rather than retirement, Brigitte Madrian, a public policy and corporate management professor at the Harvard Kennedy School of Government, suggests setting up a menu for college savings accounts similar to the designations for health insurance plans.
The bronze plan might be for parents who think their children will go to state university or community college - not exorbitant. Silver could be for a private university, gold for top-tier universities at full cost.
"It doesn't give you an exact number, but it tells you what 100 percent of cost would be, or 60 percent. Then we back out to how much you'd have to save every month for 15 years, or 10 years, to accumulate that much," Madrian says. "If it's easy to think about, people might be more inclined to start saving anything."
Reminding people to save each month by sending a paper bill or text reminder is also an effective reminder, she says. Another is to exploit tax season. "The average tax refund is $2,000, if you put it in 529 every year while kids were growing up, you'd have a significant accumulation by college."
JUST DO IT
Even though there is no parallel in 529 plans for automatic enrollment, John Beshears, an assistant professor of finance at the Stanford Graduate School of Business, says there are still ways for people to take advantage of the autopilot principle.
"You can't let perfect be the enemy of good," Beshears says. "The sums we're talking about are enormous, so take a small step. Do it in the near future. Overcome that initial barrier to action by making the problem more manageable."
His theory is that the amount you save at first does not matter - opening the account at any amount is good enough. "There's no need to do all those fancy calculations. You can work up to where you need to go."
His research shows that giving yourself a short-term deadline, like two Saturdays from now, can provide the motivation for accomplishing tasks like opening an account or starting up an autotransfer. Then pick moments in time to re-evaluate, like the first day of school every year or a child's birthday. In the field of behavioral finance, these are called "fresh start" moments.
"People feel like they have an opportunity to get on a new path," Beshears says. "The overarching theme is to get started no matter how little it is at first, and build momentum."