A college education is part of the American dream. With a quality education, you can learn skills that provide economic mobility throughout life. On average, the lifetime earnings of bachelor’s degree holders are nearly $1 million higher than high school graduates, and it’s well over $1 million for master’s degree holders, according to the Social Security Administration. There are also the less tangible benefits- college can be a fun, educational and rewarding experience for students. But it is also undeniably expensive. For 2021-2022, in-state undergraduate public colleges costs averaged over $20,000 a year, out of state costs about $40,000, and many private school costs exceed $60,000 a year.
It’s never too early to start planning for how you’ll be paying for your child’s education. For many families, the question bears down in their children’s junior or senior year of high school, but you can really benefit from thinking about it sooner rather than later.
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Getting the most for your money
Many college students rely on support from financial aid to pay the costs of college. However, for families with high incomes, financial aid may not be available, though scholarships or merit-based grants may be part of the equation. Most parents end up paying the tuition, fees, books, and housing expenses from their own income, from savings, or by taking out loans. By failing to consider these costs in their financial planning, parents may scrimp on funding their own retirement goals. A far better strategy is to develop a college-funding plan while your children are young, and to start funding it right away. This unleashes the power of time and compounding, making it easier to build up the funds needed to pay for those college expenses when they start.
The use of tax-advantaged savings vehicles can aid your strategy. 529 education savings plans, legally known as “qualified tuition plans,” are sponsored by states or educational institutions and are authorized by Section 529 of the Internal Revenue Code. 529 plans let a saver open an investment account to save for the beneficiary’s future qualified higher education expenses including tuition, fees and room and board. Interest, dividends, and capital gains from the investments are tax-free while invested in the plan. Withdrawals from the account are also tax-free if used to pay qualified education expenses. The money can be used at any college or university and can also be used to pay up to $10,000 per year per beneficiary for tuition at any elementary or secondary school. Education Savings Accounts (ESAs) offer similar advantages.
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Parents may also use retirement-based accounts such as Roth IRAs, or even loans from life insurance policies to fund their children’s educations. However, IRA funds may be needed for retirement and insurance funds for survivor protection, so education-based vehicles like 529 plans are often the most desirable option.
It’s all about your kids
The challenge with planning for college is often a lack of clarity. Kids may have no idea what they want to study or where they want to attend college. Many may even doubt whether they want to attend college in the first place. Children may focus on what they enjoy doing and hope to make a career out of it. While this is an admirable goal, it may not be the most feasible plan. For instance, your child may love painting, but is it a realistic career choice?
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It’s important for kids to understand their needs as they think about the future. It’s also important for parents to talk about college with their kids early and often. Waiting until senior year of high school to get serious about college may be a big mistake. By then the parents may be pre-retirees themselves, and their kids may be focused on making the move from high school to college, which may be one of the most challenging of their life.
It’s far better to have your plan thought out well before that transition begins. Your financial adviser can help you build your plan, maintain it, and add tweaks as the details come into focus.
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At Blankinship & Foster, we help you build a comprehensive financial plan that includes all your priorities, including college funding for the kids. We help you choose the right investment vehicles and take advantage of tax-advantaged strategies. We help you clarify and organize your finances so that you always have a clear picture of your situation. As life happens, we will be there to support you in your journey. Contact us to learn more about how we bring clarity, confidence, and direction to your personal finances.