One minute you’re buying jumbo packs of diapers at your favorite big-box store, and then (wham!), it’s kindergarten graduation, dance recitals, Little League games, driving lessons, prom, and they’re off to college.
We know parenting keeps you busy. You have bills to pay and a retirement to save for. You certainly think about college for your children, but it seems so far away. But, anyone with grown children will tell you that the days are long but the years are short. Whether your child is 2 or 12, one day all too soon you’ll be planning college visits and filling out applications.
Make time now to talk about your child’s financial future. Your child’s education is one of the most important investments you can make, and with today’s costs, it pays to plan ahead. Have you started saving for your child’s future education costs? If not, here are five steps to get started:
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 2021-22 school year was $38,185. (1)
The following table shows the average cost for one year of tuition (not including other expenses):
Even though the drastic hikes have recently tapered, if the upward trend continues, in 25 years it could cost $300,000 to obtain a four-year undergraduate degree. The costs will vary depending on the university attended, room and board, and other expenses, but, either way, that’s a pretty penny for four years of school.
For college graduates, the average student loan debt is $37,000 and the average monthly student loan payment is $460. (3) 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. (4) 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 status. 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, (5) 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.
If the process of saving for your child’s college seems daunting, Key Wealth Management can help. We can explain all your 529 plan options and other available strategies to help you maximize the amount of money you have to send your child or grandchild to college. If you already have a 529 plan set up, it is important to have an experienced professional managing the investments in your account to make sure you are still on track toward your goals.
Want to learn how you can start saving for college now? To get started, schedule an introductory appointment by reaching out to us at todd@keywealthmgt.com or (724) 934-9196.
About Todd
Todd Stepke is the founder and a financial advisor at Key Wealth Management, an independent financial firm committed to putting its clients first and building long-lasting relationships that carry them through life’s ups and downs. With over 25 years of experience in the financial industry, Todd provides his pre-retiree and retiree clients with customized solutions and a personal touch—getting to know their goals, needs, concerns, and life situations to build plans that help them pursue their ideal futures. Todd is known for going the extra mile and educating his clients, simplifying the complicated so they can make empowered and informed decisions.
Todd obtained a bachelor’s degree in accounting from Duquesne University. Spending many years as an accountant, he continually saw that his clients were not being served well by their financial advisors. Todd now blends his vast tax knowledge with his passion for seeing his clients thrive financially. Outside of work, he enjoys spending time with his wife, Kandace, biking, gardening, fishing, perusing estate sales, and trying his hand at new recipes (especially baking). To learn more about Todd, connect with him on LinkedIn.
The information in this discussion is current (and, we believe, accurate) as of the publication date, but things can change. Be sure to talk with your financial and tax advisors about your own situation when making college savings investment decisions.
Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for five years, whichever is later, may result in a 10% IRS penalty. Limitations and restrictions may apply.
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(2) https://research.collegeboard.org/trends/college-pricing
(3) https://educationdata.org/average-student-loan-payment
(4) https://www.thebalance.com/the-power-of-compound-interest-358054
(5) https://www.savingforcollege.com/article/maximum-529-plan-contribution-limits-by-state