Planning for College: How to Fund Your Child’s Future Education
Education is a Major Expense—But You Can Prepare
For many families, the dream of sending a child to college comes with a daunting price tag. With tuition costs rising steadily and inflation impacting every corner of the economy, preparing for college expenses has become a critical part of financial planning. But with a sound strategy and careful planning, families can turn uncertainty into confidence.
How Much Will be Needed?
College tuition has increased dramatically over the past few decades. Today, the average cost of attending a four-year college can range from $100,000 for a public university to nearly $250,000 or more for a private school and it’s unlikely that costs will come down much over time. Based on the rate of inflation we’ve seen, it would not be surprising that a four-year degree would cost between $200,000 and $500,000 by 2035 depending on the institution type1.
Here are the steps you’ll need to get a handle on what the future cost of your child’s education may be. To start with, you’ll need to make some assumptions:
- Think about where you’d like your child to go to school. Narrowing down the type of school and understanding the cost differential between an in-state school, something out of state or a private school will help you come up with the cost in today’s dollars.
- With an estimate of the current cost based on the type of school and estimates of future inflation, you can get started in determining what the future cost of your child’s education might be. There are many helpful online tools available for calculating future costs like CollegeSimply’s College Savings Calculator.
- Once you’ve calculated the estimated future cost, you should subtract out any financial help you expect to receive from financial aid, scholarships or other sources. We understand that it is not simple to determine possible future help with costs, especially for young children, but anything obvious will help you plan.
- Next, consider the percentage of cost you expect to cover. In some cases, parents plan on covering 100% of the cost. In others, they may expect the child to cover some portion of the expense.
- Once you’ve determined the expected future cost, you can pivot to thinking about how to fund that future expense.
How To Pay for It?
The earlier you start saving, the more time your money is able to compound. The 529 Plan is the most popular way to save for college expenses. Each state has their own individual program. You can use the program from any state, but you may have a state tax deduction if you use the program from your own state. A few points on 529’s:
- A 529 account is a tax-advantaged account for education with multiple investment options.
- Earnings grow tax deferred through the years and withdrawals of any amount are free from state and federal taxes when used for qualified education expenses.
- Each state’s plan is different, but many have a variety of investment choices to consider. Common wisdom is to use the more aggressive, stock-oriented choices for younger kids to allow for the highest growth potential and then shift to a more conservative posture when the time for college nears.
- There are no annual contribution limits, but lifetime limits vary by state.
Coverdell Savings Accounts are another savings vehicle with some similar features to 529 accounts but are limited to $2,000 annual contribution limits2.
Well in advance of the time for the child to attend school, researching grants, scholarships, federal aid and work-study programs can pay big dividends. A lot of families will fill out the FAFSA form (Free Application for Federal Student Aid) in order to determine eligibility for financial aid.
By understanding how education fits into the overall priorities and taking proactive steps, families can prepare for this event without sacrificing their financial future. If you’d like help thinking through and creating a strategy to meet these needs for your family, consider working with a OneDigital Financial Advisor. With college costs climbing as they are, preparing for future college costs is an element of a financial plan that can’t be ignored!
If you’re interested in learning more, schedule a time to meet with our team and take the next step toward financial clarity and growth.
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Investment advice offered through OneDigital Investment Advisors LLC.
OneDigital and our associates cannot provide tax or legal advice. Any tax or legal information provided is for information and educational purposes only. Please review those details with your tax and legal professionals to review your specific circumstances.
1 https://educationdata.org/average-cost-of-college
2 https://www.schwab.com/learn/story/saving-college-coverdell-education-savings-accounts
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