By Jeremy Lawton, Financial Advisor, MBA
We know parenting is a full-time job that keeps you busy 24/7. Whether you’re navigating the terrible twos or the terrible teens, your plate is pretty full. You have bills to pay and a retirement to save for. You think about college for your children, but it seems so far away. Ask anyone with grown children and they will tell you that the days are long but the years are short, and before you know it, you too will be planning college visits and filling out applications.
Your child’s education is one of the most important investments you can make, and with today’s costs, it pays to plan ahead. Have you started saving for your child’s college fund? If not, here are 5 steps to get started.
1. Know the Sticker Price
College tuition gets more expensive every year, and the numbers can cause anyone to break out in a sweat. The average sticker price for a private college for the 2021-22 school year was $38,185. (1)
The following table shows the average cost for one year of tuition (not including other expenses):
Even though the drastic hikes have recently tapered, if the upward trend continues, in 25 years it could cost $300,000 to obtain a four-year undergraduate degree. The costs will vary depending on the university attended, room and board, and other expenses, but, either way, that’s a pretty penny for four years of school.
For college graduates, the average student loan debt is $37,000 and the average monthly student loan payment is $460. (3) For students just beginning their careers, that’s a large bill to pay each month. The substantial costs may be overwhelming, but knowing what to expect gives you a goal to aim for.
2. Make Saving a Priority
It’s never too late or too early to start saving for your child’s college fund. By starting early, you can reap the rewards of compound interest. (4) If you wait, your account balance may not be as high, but you are still investing something toward your child’s future.
Even if you don’t think you have enough room in your budget to add another line item, $25 a month is still $25 more than $0. Setting up automatic contributions is a good way to remind yourself that college is getting closer, and your monthly account statement will keep this goal at the forefront of your mind. You can also make it a goal to save extra money from a raise or a bonus and invest it in your child’s future.
3. More Than One Way to Save
The most common method people use to save for college is through a 529 plan. A 529 plan is a state-sponsored education savings account that allows earnings to grow on a tax-deferred status. There are two categories of 529 plans: prepaid tuition plans and college savings plans.
Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, can be enticing. On the other hand, college savings plans have no age or income restrictions and allow you to save anywhere from $235,000 to $550,000 per child, (5) and then use it, tax-free, for qualified education expenses. As an added benefit, you are not limited to using the plan offered by the state in which you live. Some states will give you a tax credit for using their plan, but, in many cases, it’s worth it to shop around.
Beyond 529 plans, some families use Roth IRAs. Your Roth contributions can be withdrawn at any time and can be used for any purpose. In addition, Roth IRAs offer virtually unlimited investment options. And, IRAs will not have any impact on your financial aid eligibility.
For college savings, Roth IRAs aren’t the perfect option, but they do offer an alternative to traditional 529 plans. Think about opening a 529 plan for college and also continuing to contribute to a Roth for retirement. This strategy gives you extra resources to draw on if you need them.
4. Savings, Diversified
While some people are able to save and pay for the total cost of their children’s college educations, most people don’t fit into this category. Instead of letting that fact get you down, break the cost of college into thirds.
The first step is to save before your children head off to college. By starting early and having some help from the markets, you can accumulate a solid base to use for tuition and room and board. The next step is to plan on paying for about one-third of the costs while your child is in college. This can be through a combination of scholarships, grants, a part-time job for your child, or contributions from the family. The final piece is student loans that your child or you can repay after he or she has completed college. Since the goal would be to minimize student loans, try to maximize the first two parts of this three-pronged strategy first.
5. Monitor Your Progress
Just like your 401(k) plan, you need to monitor your college planning investments. In the early days of saving for college, you’ll want to be more aggressive with your investments, but as college draws closer, the investment allocation should become more conservative—just like a retirement account. Some 529 plans even offer age-based investment options that automatically become more conservative as your child gets older. It’s also helpful to monitor your balances, keep an eye on the changing college costs, and track your progress toward your goal.
We’re Here to Help
If the process of saving for your child’s college seems daunting, you’re not alone. We at Wealth Management Resources can help you gain confidence in your financial planning decisions. Let us explain all your 529 plan options and other available strategies to help you maximize the amount of money you have to send your child or grandchild to college. If you already have a 529 plan set up, it’s important to have an experienced professional managing the investments in your account to make sure you are still on track toward your goals.
Want to learn how you can start saving for college now? To schedule an introductory appointment, connect me at (401) 356-1400 ext. 119 or by email jlawton@wealthmanagers.com.
About Jeremy
Jeremy Lawton is an Investment Advisor Representative at Wealth Management Resources, Inc., an independent, fiduciary financial planning and investment management firm providing simple-to-understand guidance and solutions that help their clients pursue their goals. Jeremy prioritizes relationships, getting to know his clients, personalizing the process and strategies, and doing everything in his power to get his clients to their ideal future. Jeremy is known for going the extra mile, supporting his clients through every life stage, and his drive to grow and improve his skills to make a difference in his clients’ lives. He loves seeing clients walk out of meetings with more confidence and excitement because they know they have a plan and a dedicated team by their side.
Jeremy earned his bachelor’s degree in finance from Roger Williams University. He is a longtime hockey player and spends his free time playing for a local men’s league. When he’s not working or playing hockey, you can find Jeremy doing any outdoor activity he can find, including hiking, golfing, and skiing, and hanging out with his two Shiba Inu dogs, Kobe and Sakura. He also loves being with his family and friends. To learn more about Jeremy, connect with him on LinkedIn.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Advisor Public Disclosure Site at https://adviserinfo.sec.gov/firm/summary/45452
The information provided is for educational purposes only and is not intended to provide any investment, tax, or legal advice.
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(2) https://research.collegeboard.org/trends/college-pricing
(3) https://educationdata.org/average-student-loan-payment
(4) https://www.thebalance.com/the-power-of-compound-interest-358054
(5) https://www.savingforcollege.com/article/maximum-529-plan-contribution-limits-by-state