Preparing for higher education is an important component of your overall financial plan. And let’s face it: soaring college tuition costs can also be a source of concern for both students and parents alike.
Incorporating a college savings plan into your financial planning process means taking a close look at college expenses and exploring diversifying your savings. Don’t get caught without a financial plan for college savings—let’s examine five steps to a sound college plan.
1. Collect the Facts
College tuition gets more expensive every year, and the numbers can cause anyone to break out in a sweat. The average sticker price for a private college for the 2023-24 school year is more than $55,000.
The following table shows the average cost of tuition over the last 20 years through 2022-23:
Source: College Board, Trends in College Pricing and Student Aid 2022, Figure CP-2.
Even though the drastic hikes have recently tapered, if the upward trend continues, in 2040 a 4-year private college could cost nearly $100,000 per year. The costs will vary depending on the university attended, room and board, and other expenses, but either way, it’s best to start prepping now.
For college graduates, the average student loan debt is around $37,000-$40,000 and the average monthly student loan payment is $503. For students just beginning their careers, that’s a large bill to pay each month. The substantial costs may be overwhelming, but knowing what to expect gives you a goal to aim for.
2. Start Saving
It’s never too late or too early to start saving for your child’s college fund. By starting early, you can reap the rewards of compound interest. If you wait, your account balance may not be as high, but you are still investing something toward your child’s future.
Even if you don’t think you have enough room in your budget to add another line item, $25 a month is still $25 more than $0. Setting up automatic contributions is a good way to remind yourself that college is getting closer, and your monthly account statement will keep this goal at the forefront of your mind. You can also make it a goal to save extra money from a raise or a bonus and invest it in your child’s future.
3. Different Ways to Save
The most common method people use to save for college is through a 529 plan. A 529 plan is a state-sponsored education savings account that allows earnings to grow on a tax-deferred basis. There are two categories of 529 plans: prepaid tuition plans and college savings plans.
Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, can be enticing. On the other hand, college savings plans have no age or income restrictions and allow you to save anywhere from $235,000 to $550,000 per child, and then use it, tax-free, for qualified education expenses. As an added benefit, you are not limited to using the plan offered by the state in which you live. Some states will give you a tax credit for using their plan, but, in many cases, it’s worth it to shop around.
Beyond 529 plans, some families use Roth IRAs. Your Roth contributions can be withdrawn at any time and can be used for any purpose. In addition, Roth IRAs offer virtually unlimited investment options. And, IRAs will not have any impact on your financial aid eligibility.
For college savings, Roth IRAs aren’t the perfect option, but they do offer an alternative to traditional 529 plans. Think about opening a 529 plan for college and also continuing to contribute to a Roth for retirement. This strategy gives you extra resources to draw on if you need them.
4. Diversify Your Savings
While some people are able to save and pay for the total cost of their children’s college educations, most people don’t fit into this category. Instead of letting that fact get you down, break the cost of college into thirds.
The first step is to save before your children head off to college. By starting early and having some help from the markets, you can accumulate a solid base to use for tuition and room and board. The next step is to plan on paying for about one-third of the costs while your child is in college. This can be through a combination of scholarships, grants, a part-time job for your child, or contributions from the family. The final piece is student loans that your child or you can repay after he or she has completed college. Since the goal would be to minimize student loans, try to maximize the first two parts of this three-pronged strategy first.
5. Check Your Progress
Just like your 401(k) plan, you need to monitor your college planning investments. In the early days of saving for college, you’ll want to be more aggressive with your investments, but as college draws closer, the investment allocation should become more conservative—just like a retirement account. Some 529 plans even offer age-based investment options that automatically become more conservative as your child gets older. It is also helpful to monitor your balances, keep an eye on the changing college costs, and track your progress toward your goal.
Remember, while the journey toward higher education may present challenges, proactive financial planning and smart decision-making can transform those challenges into opportunities. Partnering with an experienced and qualified financial professional can go a long way in easing the emotional and financial burden that often accompanies college planning. We at Premier Planning Group are ready to help create a strategic financial college plan to take care of your child’s academic future.
If you want to explore college savings options, call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at taliagrover@premierplanninggroup.com to set up a complimentary consultation.
About Brion
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit Brokerage Services for eight years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
*The #1 Advisor and Leadership Award is based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.