When they have children, most people start thinking about dividing their earnings into three buckets: paying for their current expenses, their children’s college education, and saving for retirement. The sooner you start investing, the better, but not at the expense of your retirement savings. It is essential that you take care of your own financial security first.
There are numerous ways to fund a college education. Your kids may even earn full-ride scholarships! But, there is only one way to pay for your retirement—save for it now.
Options for Paying for College
There are many options available for paying for college:
- Using savings or a current cash flow
- Taking out loans
- Earning scholarships
- Applying for grants
- Applying for financial aid
Step One: Deciding How Much College Education You Can Afford
Before talking to your children about what college funding options you plan to offer, it is a great idea to think this through in advance. Here are some questions to help you get started:
- Do you plan to pay for your child/children’s entire college education? Or will you be setting limits? Many parents would like to set their kids off on a path with a fully funded college education and no debt. The question is, does that make sense in your situation?
- Do you have children who are likely to want to go to college, or is it your expectation that they do so?
- Are you willing to fund any college or are there restrictions?
- Will you fund any major, or are you restricting your funding to specific fields?
- Will you pay for community college, four-year college, and/or graduate schools?
- Does your child have to maintain a grade standard to receive funding from you?
- Do you expect your children to go to a school for a practical education, or are you aiming for a name-brand school or an alma mater?
- Based on your child’s interests, what do you expect they will earn after graduating?
Step Two: Consider College Savings Plans
Most people have heard of 529 savings plans. These tax-advantaged college savings plans are a great way to save money for college tax-free. Some states also offer a tax deduction on contributions to these plans. If yours does not, consider looking in another state to see if it offers a better option.
There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one plan. Prepaid tuition plans let you purchase units or credits at participating colleges and universities. You are buying future college credit at today’s prices. This credit cannot be used for room and board. Prepaid plans are not guaranteed by the federal government and are only guaranteed in some states.
Education savings plans allow you to save for all qualified higher education expenses—tuition, mandatory fees, and room and board. Education savings plans can also be used to pay for tuition at any public, private, or religious elementary or secondary school for up to $10,000 per year per beneficiary.
Points to consider about 529 plans
There are fees associated with both prepaid tuition plans and education savings plans.
It is worth noting that money in a 529 savings plan can only be used for higher education expenses. There is a 10% tax penalty to take the money out for any other reason. There are exceptions to this rule.
Evaluate the investment options available in your state’s 529 plan. They may be limited. For this reason, many people opt to save in a brokerage account instead.
The problem is that you need to start savings long before you even know if your kids have the plans and aptitude to attend college. It is also impossible to predict what the future college education landscape will look like. Low-cost online programs are putting significant financial pressure on expensive universities.
Anyone can contribute to your child’s 529 plan. It is worth considering opening one just for this purpose.
Step Three: What are Your Children’s Expectations?
It is also important to learn more about your children’s expectations to ensure they are realistic in their plans. Here are some topics to consider.
- Discuss the annual cost of college in your area.
- Compare the costs of public and private schools and the cost of community college followed by a four-year university versus going to a four-year university.
- Discuss how your children can contribute to their college financing.
- Discuss expectations for majors and career options.
- Lay out your expectations in terms of grades, repeating courses, number of years in school, etc.
Whichever choice you make for savings for a college education, the important thing is to start saving now. Doing so will give your money time to compound.
There is no one-size-fits-all guide to saving for college. Working with a wealth manager can ensure you make the best financial decisions for yourself and your loved ones.
