Whether you’re raising one, two, or more kids, having children adds another layer to your financial plan. You need to account for another mouth to house and feed, but on top of that, you need to plan ahead for their education.
Unfortunately, today’s college funding landscape is far from inviting.
For the class of 2018, nearly 70% of college graduates took out student loans and finished school with an average debt of $29,800.
But going to college doesn’t automatically mean carrying tens of thousands in debt. With strategic financial planning, you can fund most, if not all, of your child’s college education and help reduce their future student loan burden. Here are six secrets to making it possible.
1. It’s never too early to start
In case you thought too early was possible, know that it’s fine to begin setting aside money for your kids to go to college as soon as they’re born. In fact, you can even start earlier if your finances allow for it.
If that feels like jumping the gun, remember that college isn’t a small expense to save up for. The more time you build into your child’s college savings, the better prepared you’ll be for such a large investment. In addition, thanks to compound interest, establishing a saving strategy early on can also mean more returns in the long run.
2. Find the right savings option for you
There isn’t just one way to save for your child’s college. You’ve got a few options, each of which has their own distinct advantages:
- 529 college savings plan – There are no income restrictions for opening a 529 plan, an account specifically designed for education savings. Although originally intended for higher education costs, recent reforms have expanded their usage to cover some elementary through high school expenses. In the end, however, any withdrawals must go toward qualified education expenses, lest you pay a tax penalty.
- Roth IRA – Though commonly thought of as retirement accounts, Roth IRAs are an alternative college savings option. Unlike 529 plans, withdrawals are not limited to education expenses. In fact, you can withdraw contributions (not investment earnings) anytime without the fear of incurring any taxes or penalties. It’s not a perfect savings option, though—withdrawals from a Roth IRA count as income and will affect your child’s eligibility for financial aid.
3. Make regular contributions
With the right savings option to meet your needs, it’s on you to make regular contributions.
However, that’s often easier said than done. If you’re finding it difficult to maximize your contributions to your child’s college fund, try these tips to get into the habit.
- Create and stick to a monthly budget. After accounting for your regular savings and emergency fund, put remaining money toward college savings.
- Better yet, allocate a set amount in your budget to go toward your child’s college fund. Treat it as you would any other necessary budget category, like rent or electricity.
- Automate your contributions so that you don’t have to make manual deposits. By doing this, you can’t make up any excuse for forgetting to contribute!
4. Get grandparents and extended family to help
You don’t have to handle funding your child’s college education all on your own, although you should expect to pay the lion’s share, of course.
When the holidays or birthdays roll around, consider getting grandparents and other extended family members to contribute to their college savings instead of buying clothes or toys. This makes the perfect gift for any family member who lives far away, and one can argue that it’s even more meaningful in the long run.
After all, financial support for your children’s education easily outlasts all of the material goods that kids will inevitably grow out of—and even the smallest amount of support grows over time.
5. It’s okay to aim for less than full tuition
The average cost of college for one year runs anywhere from $20,000 to $47,000 depending on the university.
Assuming your child doesn’t graduate early or require an additional year of study, multiply that by four for a rough estimate of what your child’s undergraduate education will cost. If you have or plan on having more than one kid, double or triple that amount accordingly.
Chances are that number is much higher than you’d prefer to pay—and that’s perfectly okay. The reality is: you don’t need to pay for all of your child’s college expenses.
Instead, set a goal of half of the estimated cost of college. This eases your burden and builds in flexibility for scholarships, financial aid, and the chance for your child to work and contribute to their own education.
6. Prepare for change
The higher education landscape is changing rapidly in the U.S.
Two-year programs are coming back into vogue, and more online options are available than ever.
Additionally, short-term alternatives like coding bootcamps are growing in popularity, meaning that future generations may not even go to college at all.
That said, you should familiarize yourself with the details of whatever college savings vehicle you use. For instance, with a 529 savings plan, you can change the designated beneficiary to any other family member—including yourself—without the threat of paying any taxes or penalties if the money still goes toward qualified education expenses. Knowing these intricacies will prepare you to adapt in the event your child’s college plans veer off course.
Conclusion
Though a hefty investment, paying for college doesn’t have to be a tremendous financial burden for you. The reality of saving for your child’s college education is doable so long as you give yourself ample time. Strategic financial planning can also help put you on track to make this goal more attainable.
And while it may seem so far away, learning to play the long game when saving for college has big benefits. For one, it’ll make your later parenting years less stressful. But perhaps more importantly, it’ll ease your child’s future student loan debt.
Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.
Your Financial Mom blog posts are not meant to be legal, accounting or other professional service advice. Content represents the opinion of the author only. Pathfinder Planning LLC is not responsible for the accuracy or validity of content contained in third-party comments.