College Funding: Are You Prepared To Pay Double Today's Rates?
The price of college keeps skyrocketing, with tuition inflation averaging 5% per year.1 That means if your child is born today, and the current pace of inflation holds that would mean that you would be paying more than double what it costs today.
We all want our kids to have the same opportunities that we had, so how can we prepare for this kind of expense?
First, should you?
You can take out loans for school, but you can't take out loans for retirement.
From a planning perspective, your retirement and certain other specific goals first. The most important factor in being successful in long term savings for retirement is time. Early working years, including those when most people are having their first kids. Retirement savings should be made the priority, and educational savings need to come later.
If saving for your kids' education is a priority for you, here are some tips to follow:
Education Account Types
There are two main types of accounts we recommend, 529 plans and Educational Savings Accounts (ESA's). For my family, we choose to utilize 529 plans. Both accounts you put money in, and it grows tax deferred, and as long as the money is used for education expenses (tuition, books, etc.) it comes out tax free. You can invest the funds in the account into mutual funds or ETFs to maximize the growth potential.
If you plan on sending your kids to private school through high school, you can utilize these accounts to pay for that as well.
A big benefit of 529s is that certain states, if you live in them and invest in plans of those states, allow for state income tax deductions for putting money into these plans. This can be a great strategy to save on taxes as well as save for college.
Flexibility is a key benefit of these plans too. The funds can be used at any accredited school anywhere in the country. I generally don't recommend prepaid tuition credits because of the limited flexibility that comes with them.
Scholarships: A Part Time Job
There are thousands of scholarships out there that can be applied for, and it is not uncommon for some to go unawarded. Starting in your kid's sophomore or junior year of high school, their part time job needs to become finding them and applying. Most of the applications are so similar that a few, well-written essays will probably cover the majority of questions that students may be required to answer, with a few tweaks here and there.
Let's say for two years your child applied for 2 per weekday. That's 10 per week, a little over 1,000 applied for scholarships over two years. Even if they only get a small fraction of those the amount of potential money for education could be astounding.
Any scholarship money that is sent directly to the school can also be withdrawn from a 529 without penalty.
Long Distance Alternative
I went to grad school at a public university in Germany. The total cost to get an MBA there: about $6,000. Public universities in Germany and many other European countries have free tuition at public schools. Rather than study abroad, maybe education abroad could be an opportunity. It is an amazing experience to go and actually live in another country, and will set them apart on their resumes for sure.
In summary, the most important thing to remember is that edsavings needs to fall within the bounds of your financial plan, and you must consider putting your retirement needs head of educational savings.
Ready to plan for your future educational needs?
All written content on this site is for information purposes only. Opinions expressed herein are solely those of Snowcap Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
1https://www.savingforcollege.com/tutorial101/the-real-cost-of-higher-education
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