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A Primer for College Savings

The Wall Street Journal ran an article this week citing how the cost of college tuition has slowed for the first time in almost three decades. According to CollegeBoard, the average cost at a 4-year in-state public university (tuition, fees, room & board) rose from roughly $19,500 in 2015 – 2016 to a little over $20,000 in 2016 – 2017. This equates to a modest 2.5% increase year-over-year. I use the term “modest” given the fact that since the 1990’s, higher education costs grew at nearly 6% per year.

It’s no secret that the cost of higher education represents a major financial burden for most families and their children. Even if these expenses inflate at lower rates in the years ahead, many parents are unsure of their ability to cover the costs. Yet they understand the importance of their children receiving a degree to secure a brighter future.

So, what can be done to better prepare for these expenses? A lot depends on how old your children are and how much room you have in your budget.

For those with younger children, consider the following:

1) Make a plan. The first step is to determine how saving for college integrates with your overall financial plans. It’s often said that you can borrow money for college but you can’t finance your retirement. For those that wish to help pay for a child or family member’s education, this priority should be secondary to your own retirement savings. It’s also important to have an emergency fund for those “what-if” expenses. It does no good if you to tap your kids’ college fund to fix your car or repair the roof on your house.

2) Start saving today. A 529 plan is the preferred vehicle for saving for college. These plans allow for after-tax contributions and the opportunity for tax-free growth for “qualified” education expenses. While there is no annual contribution limit, we recommend keeping them below the annual gift tax limit, which allows each parent to contribute up to $14,000 ($28,000 total) per child each year.

3) Set realistic savings goals. While many parents hope to pay the full costs for their children’s college education, it may not be possible without undercutting their own retirement savings. We often recommend parents aim for a 50% – 75% savings goal. The goal may still be lofty but the monthly savings amounts are more practical. The remaining costs can be covered through cash flow, additional savings, scholarships, or student loans.

For parents whose kids are nearing college age, here are some tips:

1) Do your homework. One of the first steps to take is to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA determines whether your child will qualify for financial aid based upon income, assets, and other financial measures. For those who are ineligible for financial aid, apply for scholarships and grants. There are literally millions of dollars in scholarships available for students and no amount is too small or insignificant. Here’s an article from USA Today listing the 10 best websites for researching available scholarships.

2) Don’t pay the sticker price. Colleges are competing when it comes to enrollment and may be willing to negotiate on price. It’s especially true for smaller, private schools that traditionally have higher tuition costs but must compete against larger state-funded universities that are less expensive. These schools may also offer academic or merit-based incentives to recruit future students.

3) Don’t make an emotional decision. You may wish for your child to attend your Alma Mater, or your son or daughter may only be focused on their “dream” school. However, these options may not be financially feasible (not to mention the academic requirements). It’s not to say that you or your children shouldn’t set it as a goal, and it’s important for students to have a meaningful college experience. But it’s wise to consider other more affordable options if the top choice schools are likely to bust your budget.

4) Talk to your kids about the cost of going to college. Many parents avoid discussing finances with their children. It’s usually a result of their own parents failing to discuss it with them. College expenses provide a great opportunity to have this conversation with your kids. Helping them understand the magnitude of the costs and how it may impact your and/or their financial future may lead to better decisions. It can also help set a foundation for when they get into the real world and must make important financial decisions on their own.

There is a lot that goes into saving for college, much of which is beyond the scope of this article. It’s undeniable that the cost of a higher education has risen at astronomical rates for the last 20 – 30 years, and it’s likely that we will see those costs continue to rise. But these tips should help whether you have a newborn or a kid in high school.

Ultimately, parents who wish to shoulder this financial burden for their children must plan as far ahead as possible and set clear goals. If you need guidance in creating such a plan for your family, we would love the opportunity to help.

Will Goodson

Will is a senior advisor who designs financial plans and investment strategies for clients. He is a University of Texas graduate and a CERTIFIED FINANCIAL PLANNER™ professional. Additionally, Will has obtained the National Social Security Advisor (NSSA®) designation and works closely with wealth management clients to determine the most optimal strategies for taking Social Security and Medicare. Read Will’s Profile HereRead More Articles by Will

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