The growing cost of college for our children can be downright overwhelming. Many parents are still paying off their own student loan debt. So thinking about the best ways to save for their kids’ college often gets delayed.
College costs in the US have steeply increased over the past few decades. From 1985 to 2011, the price of college rose 498%, according to Forbes, while the general inflation rate over the same period was only 114%.
Despite increasing costs, parents can’t ignore college without significant financial and/or career consequences for their kids. USA Today reports college graduates out-earn high school graduates by over 50%.
As tempting as it may be to bury your head in the sand about college, don’t.
It’s important to think through and plan for the next eighteen or less years in your child’s life to come up with, at the very least, a rough game plan for how your family will pay for your child’s higher education. Then, it’s time for saving and finally implementing your plan. So that when your child is ready to go to college, you and your finances are prepared as well.
It’s nothing short of shocking to see how much college will cost ten to twenty years from now. The numbers can feel astronomical. But giving yourself several decades of lead time can give you the momentum to accomplish some large financial goals.
For example, you may decide to pay for your child’s education with money you currently allocate to the mortgage. But to do that, you’ll need to pay off your mortgage by the time they head to college. This might mean refinancing to a 15-year loan.
There are calculators to help you estimate the total cost of public universities, private universities, and trade schools, depending on your child’s age. You can also use this calculator to determine your Expected Family Contribution (EFC) for college.
The EFC is a number used to determine the aid given to you by the colleges your child applies to. It takes into consideration your taxed and untaxed income, assets, and benefits, as well as your family’s size and the number of children you’ll have in college at the same time. Most families report this number is much higher than they expected.
Now, working backward from that number, you can formulate a plan to save.
Personal Capital has a great tool for its users (it’s free to sign up) to map out various scenarios. In the “Planning” tab, click on “New Scenario” to input all the variables. These include the amount of time until your first child goes to college, the amount you’d like to have saved, and what you’ll also need to save for retirement. Personal Capital will then provide an estimate of how much you need to save each year to hit your goal.
If you or your child have a private college or university in mind, you’ll be able to determine if you can save all (or even part) of the cost of their education. If that’s not possible, then you can begin to figure out what’s more realistic for your family.
- Could your child attend a public school, rather than a private?
- Is finishing a Bachelor’s degree in three years to save money a possibility?
- Could attending a community college the first year or two be possible?
- Could he take advantage of the myriad of online resources for higher education, like Coursera?
And while traditional college might be your dream for your child, it’s not necessarily his dream. High school graduates have many options today. Including online college degrees, to put them on the road to a bright financial future. And not leave them with five or six figures of debt as they start their careers.
It’s also important to realize you may be able to save the majority of college costs in several years.
If you’re in the middle of paying off debt, you certainly don’t want to stop your momentum to save for college. But once your debt is paid off in a few years, apply the same discipline to college savings as well. And then you can play catch-up.
Communicate with Your Kids
It’s important to let your kids know what you are, and aren’t, willing to do for college. Making those decisions early on will allow your child time to mentally and financially prepare.
Determining how much you agree to pay for your children’s college years is an essential first step. Take the time to figure out inflation-adjusted public and private school tuitions for the years they will attend college.
This will help you think through some basic questions–
- Are you willing to pay for the “best” school your child is accepted to, no matter the cost?
- Do you want your child to shoulder some of the financial responsibility?
- How do you feel about student loans and debt?
- How do you feel about community colleges?
Another option is to determine a figure you’ll set aside to pay for their college years and offer your child the choice of how to use the money.
If they choose an expensive college costing more than what you’ll pay, they’ll need to make up the difference. If they select a path costing less than what you are willing to pay for them to earn their degree or start a successful career, they get to keep the difference.
These are just a few ways parents can begin thinking about the challenge of funding higher education costs for their children.
It’s important for parents to communicate college costs clearly and to help teens understand interest rates and payments on large loans they may need or want to take out to attend college. While your teen may not be happy about what they hear, everyone will be on the same page about plans for paying college costs.
Saving for College Expenses
While almost no financial expert recommends saving for your children’s’ college at the expense of your own retirement, many recommend opening a college savings account when your child is born.
Get into the habit early on of saving all birthday, Christmas, or other monetary gifts in a college account, and you’ll see these accounts grow over time. Seeing this growth will hopefully encourage you to save more and more each year.
Any amount you save is better than nothing. So even if your child starts college with only ¼ of the total amount she’ll need, she’ll be better off than if she has to take out loans for all four years.
Open a 529-or Don’t?
There are several ways you can save for higher education expenses for your kids. The most popular is the 529 account. 529 accounts allow your savings to grow tax-free and withdrawals of tax-free earnings for qualified educational expenses.
While some states allow an income tax deduction for the accounts, not all states allow tax deductions for contributions, and the money in a 529 account is restricted in its use.
If your child decides not to attend college, you’re more limited in how the funds can be used, or you’ll pay a penalty to take funds out, although you can switch the beneficiary on the account. If one child opts to forgo college, but another gets into an expensive private school, you can use the first child’s account to pay for the second’s college.
Also, the affordability and quality of 529 investment accounts vary widely from state to state. One way around this problem is to open a 529 account from another state. Vanguard, for example, operates out of the state of Nevada but allows individuals from any state in the US to open an account. Vanguard charges a low .15% expense ratio for many index funds offered in their 529 plans.
Coverdell Education Savings Account
Another college savings option is the (Coverdell) Education Savings Account or ESA. ESAs allow up to $2,000/year, per child in after-tax contributions for college, which grow tax-free.
Unfortunately, there are some restrictions on these accounts making them a less-favorable college savings option. There are income restrictions on who can contribute to an ESA, and the account must be used by your child by the time she turns 30 for qualified educational expenses.
Uniform Transfer to Minors Account
There’s also what’s known as a UTMA, or a Uniform Transfer to Minors Account. Parents designate a beneficiary for the fund — who can’t be changed — and once the beneficiary reaches age 18, the account is transferred over to him. The money is then able to be spent any way he wishes. The first $1,000 saved is tax-free, additional funds are then taxed at the child’s or the parents’ income tax level.
Savings in Your Name
Most experts do not recommend saving money in accounts in your child’s name since assets in their name would have a more negative impact on their ability to access financial aid and grants than it would assets in your name.
While you could open a savings account in your name, giving you the most flexibility for your savings dollars, a savings account won’t give you any tax shelter when you use the money. Also, you’re unlikely to get a very good interest rate on your savings — another reason why 529s have become a more popular option.
No matter how you decide to save for college, it’s important to plan early. Take a look at a few online calculators and estimate how much your children will need for their education. Then allow yourself to formulate various solutions for paying for college.
Article written by Laurie
Originally published at womenwhomoney.com on December 4, 2018.