Over the past several decades, a college education has come to be seen as a necessity. If you want to secure a good job with the possibility of upward mobility, you’ll likely need at least a bachelor’s degree to help you get there. However, with tuition costs greatly outpacing the overall cost of inflation, actually affording college has become a real challenge for many individuals and families.
From estimating the overall cost for higher education a decade from now to trying to determine how much financial aid you will be able to secure, there’s a lot to consider when planning to fund an education. Review the five strategies below to start developing your plan of action for your children’s future college education.
#1 Estimate Your Costs
If you’re planning to pay for college, you need to have a realistic idea of what that will cost. Higher education is more expensive than it has ever been, and it’s expected to continue to climb in years to come. According to an article from Forbes, college tuition rose by a whopping 497 percent over 32 years, which is two times greater than the annual inflation rate.
Many colleges and universities offer a net price calculator to help you estimate the cost of earning a degree in the future. By visiting the U.S. Department of Education’s website, you can search for any institution’s net price calculator.
Once you have an idea of how much you need to set aside for college, you should connect with a financial advisor to develop a plan that incorporates all funding sources – scholarships and other financial aid, savings, student income, and more.
#2 Don’t Count on Financial Aid
A full-ride scholarship is a rare entity. In fact, Savingforcollege.com analyzed data from the National Postsecondary Student Aid Study and found that only 1.5 percent of undergraduate students receive enough financial aid to cover 100 percent of the cost of attendance.
While you may have high hopes for your star athlete or scholar, you need to have a plan in place to cover any deficits that might exist after scholarships and grants have been awarded. This will help prevent the need to secure costly loans or eliminate dream colleges because of expense.
Since it’s clear that there are limitations to financial aid, don’t be deterred from investing. Your investments will be factored into your Expected Family Contribution (EFC) when filling out the Free Application for Federal Student Aid (FAFSA), but assets aren’t weighted as heavily as income.
#3 Separate Retirement and College Accounts
By the time you’re ready to start paying for your children’s education, you will probably have quite a bit saved in your retirement accounts. It can be tempting to use that money to ease the financial strain of college, but it could have serious consequences on the growth of your retirement accounts. Not only will you lose out on compounding interest and other investment earnings, but you may encounter taxes and penalties.
There is also the potential that money from retirement savings could reduce the amount of federal aid you’re eligible to receive, as this money could be considered income. (There are specific accounts – known as 529 plans – that are designed for college savings with tax benefits unique to them. More on that option below.)
#4 Invest in the Future
The standard rules for investing apply to investing for college as well: Start as soon as you can and keep your money invested as long as possible. Put the power of compound interest to work for you – and make your investments automatic so you aren’t tempted to pass on them month by month. If you can put additional dollars toward your investments because of bonuses, raises or tax refunds, that’s even better.
As already mentioned, the rate of tuition inflation has been outpacing daily inflation – and certainly the interest rate for most savings options such as CDs, checking accounts, and savings accounts. Investing, on the other hand, typically has a higher rate of return, which translates to more money faster.
Time invested also plays a key role in how those investments can grow. A nicely diversified portfolio with a mix of stocks and bonds can offer the ability to grow while providing some stability to keep you moving toward your goals.
#5 Utilize Tax-Advantaged Plans
A specific investment account exists just for college savings: the 529 plan. This type of plan allows families to make withdrawals for college expenses without paying any taxes. In fact, they can even be used to cover education costs starting as early as kindergarten. Though these plans may differ by state, some states allow you to deduct your contributions to a 529 plan from your state income for additional tax savings.
It might be wise to avoid making your child the owner of the account. Savings in a 529 plan can be considered when assessing for the FAFSA. If a child’s name is on the account, that could prove detrimental to the overall financial aid package they may be offered. Family members are also welcome to contribute to a 529 plan – and these contributions can also help reduce estate taxes. However, family members should communicate to ensure they do not overfund the account, as there are maximum contribution limits.
Create Your College Funding Plan
There’s no better time to get started planning for your children’s college education than right now. Even if your little one is not yet out of diapers, the sooner you start, the more you’ll be able to save. The five strategies above will help you make the most out of your college funding plans, but if you’d like some professional input on your planning, contact the advisors at Flourish. We would be happy to work with you to craft the best strategy for your family’s needs.