By Mark Colgan, CFP
Smart parents are thoughtful and intentional about
how they cover the cost of their child’s education.
You want the best for your children: to help them learn and develop, and to make their dreams come true. A college education is the foundation for a meaningful career path in the United States, while tuition costs – already astronomical – continue to rise. Additionally, parents trying to save for their children may be setting aside money for retirement and even their own parents. This can make saving for college even more challenging.
Mark Colgan
You may be wondering how to save for your child’s college needs. More specifically, you may be asking yourself:
- How much do I need to set aside?
- What types of investments should I be making?
- Are there other opportunities I could leverage?
If any of these questions resonate with you, keep reading this guide. You’ll discover the ins and outs of planning for your child’s success, including five strategies you can implement right away!
Step 1: Focus on Your Savings
There’s no denying the benefits of a college education: the ability to compete in today’s job market, increased earning power and expanded horizons. These advantages come at an increasingly steep price, yet, year after year, thousands of students graduate from college. So how do they do it? Many families finance a college education with help from student loans and other types of financial aid such as grants, work-study, private loans, current income, gifts from grandparents, and other creative cost-cutting measures. But savings are the cornerstone of any successful college financing plan.
It’s important to start a college fund as soon as possible. Next to buying a home, a college education might be the biggest purchase you ever make. According to College Board, a nonprofit designed to make higher education more accessible, the average in-state cost for the 2021-2022 school year at public four-year colleges was $27,330. This figure was dwarfed by the average yearly cost of four-year private schools, which was $55,800. Many elite private colleges are substantially more expensive.
Start saving with whatever amount you can afford. If you invest regularly over time, you may be surprised at how much you can accumulate in your child’s college fund. Also, make increases to your systematic investing or lump sum deposits when you receive a salary raise, tax refund, unexpected windfalls, and the like.
Step 2: Ensure that the Right Accounts are Owned by the Right People
Colleges use a complex method to calculate how much money your family will be expected to contribute to your student’s college tuition. Assets that belong to the student are weighted differently from assets that belong to the parents, as is income from different sources. For example, a 529 college savings plan is made for the benefit of the student, though technically it may be owned by a parent, grandparent, or another adult. Because these savings are not in the child’s name, it can be favorable when calculating financial aid. Understanding how to leverage the right accounts, and who should own them can have a notable impact on the overall cost of education.
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Step 3: Harness Family Contributions, Financial Aid, and Tax Incentives
If you are lucky, close friends or relatives may also want to lend support to your child’s education. Providing an easy, strategic way for your loved ones to give can help their contributions make a greater impact. Have them donate systematically each month, as this is convenient, and they may be further motivated by possible tax deductions.
Many folks can also benefit from some form of financial aid to pay for college. Financial aid may include loans, grants, scholarships, and work-study. It is often based on financial need or merit. To determine financial need, the federal government and prospective colleges look primarily at your family’s income. One helpful tool to estimate costs is a net price calculator, which is available on every college website. Using this can help you get an idea of the dollar amount your child might be eligible for in aid at a particular college. However, beware of borrowing too much to pay for college. Excessive student loan debt — and parent debt — can negatively affect borrowers for years to come. The more you save beforehand, the less you and your child will potentially need to borrow in the future.
Also, be sure to ask your tax preparer if you are eligible for The American Opportunity Tax Credit or The Lifetime Learning Credit. If you qualify, you might save even more money on the cost of higher education thanks to a few other tax benefits.
Step 4: Create a Flexible Plan
Chances are that your child is not sure about “what they want to do for a living”. Even if they do, they will likely change their mind. Children may explore several different colleges and programs, each with different price tags and funding options. Or your child may choose a path other than attending college, yet still require financial support. Therefore, your plan should include some flexibility. If you are fortunate, grants, scholarships, or other sources of support may become available, affecting the amount of money you need to set aside.
Step 5: Begin College Selection Process in Sophomore Year
There is a lot to think about when it comes to selecting the right education path and college. Missteps can be made, and opportunities overlooked. And many of the decisions that need to be made are best processed over time, not on short notice. We recommend that when your child is a sophomore in high school, you begin working with your school counselor or a dedicated college planner. They can work with you and your family to create a step-by-step plan that propels your child toward their hopes and dreams without undue burden on your part.
About the author: Mark Colgan
Mark Colgan, CFP®, is a founding partner of Montage Wealth Management. Over the last 29 years, he has helped hundreds of clients navigate through significant life events that require big money decisions. He is also the author of Death’s Red Tape, your Guide for Navigating Legal, Financial, and Personal Transitions When a Partner Dies, a newly released technical guide by Mark Colgan on the logistics people have to contend with after they lose a loved one. For more information visit www.montagewealthmanagement.com.
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