If parents could describe college planning in one word, it would be
Parents have so many questions swirling in their minds, like
- How much does it actually cost?
- Where will my child go to school?
- How early should I start saving?
- Am I capable of paying the entire cost without uprooting my own financial goals?
- Is my child aware of the financial implications of student loans?
Fortunately, hope is not lost! With a sound understanding of the college-funding process, a proactive saving strategy, and a rock-solid financial plan, you are more than capable of crafting a successful college experience for your child.
So, where do you start?
Understand The Cost of College
Before you can answer the questions above, you must know the true cost of college. Keep in mind that the “sticker” price colleges list on their websites doesn’t likely include various benefits such as financial aid, scholarships, or grants.
On the flip side, there is a solid chance these sites left out a few significant expenses such as room and board, textbooks, and technology.
Before you implement a savings plan, you need to grasp all of the potential costs and benefits. A great way to do this is by getting a copy of your free College Money Report. In your report, you’ll find an outline of how financial aid works and which schools are likely to give you the most “free money.”
Here are three critical outputs of the College Money Report. You’ll learn
- How much colleges think your family can afford.
- Whether or not you’ll qualify for grants or scholarships.
- How much you can expect to pay out of pocket.
Narrow The List of Schools
Think about choosing a school like deciding where to live.
There are pros and cons to every option. Say one house is nicer than another, but it’s not in a great neighborhood. Or the neighborhood and school systems are fantastic, but you’re worried you’ll outgrow the house too soon.
The way you decide is to list the advantages and disadvantages and rank your top priorities. Your child can apply the same idea to their college decision. Start by listing all the elements they want to consider for each school:
- The range of academic programs
- Research and work-study opportunities
- The total cost
- Financial Aid (scholarships, grants, access to loans, etc.)
- Career preparation
Once you have the list, have your child rank their top priorities. Perhaps your child thrives in smaller classroom settings and wants more one-on-one instruction. In that case, a large state school may not be the best fit, and they may be more interested in smaller colleges.
Or, maybe your child is more focused on graduating with as little debt as possible, so they opt for the school that offers the most financial aid, where any financial help they get from you will go further, and they’ll have to take on fewer loans.
Have your child complete this exercise until they’ve narrowed their list down to roughly five or so schools. That’s a manageable number to do more in-depth research.
With a smaller pool of potential institutions, you can seek out college-specific scholarships and get a deeper understanding of the cost of living at different locations. For example, going to an out-of-state school, even with a scholarship, could be more expensive since your child needs to travel home often.
Even a quick search on Zillow may reveal that off-campus housing is far more expensive at schools in major cities than in rural college towns.
Again, there will be pros and cons to every school. The most important thing is that you and your child carefully weigh all of their options and help them come to a decision that’s best for them—personally, academically, and financially.
Set A Realistic Budget You’ll Want To Use
Creating a budget for college isn’t a walk in the park, but it is an integral step to ensure you can help support your kids without derailing your personal financial situation.
Be sure to set clear expectations and boundaries regarding money and college. Ask yourself,
What can you afford to pay for?
Perhaps it’s tuition, room and board, and supplies. Or maybe you can only cover the tuition bill. Take a look at your investments (529, brokerage account, Roth IRA, etc.) and get a better idea of how much money you have to work with.
Then, turn this experience into a teachable moment. If you tell your kids they have $25,000 per year for school, walk them through different scenarios for how they could use that money.
If they choose an affordable school where the funds go further, they won’t have to take out as many loans. But if they choose a pricey, private, out-of-state school, they may be in a very different financial situation come graduation.
In addition to more considerable college costs like tuition and room and board, you’ll also have to talk through additional costs like entertainment, dining out, transportation, emergencies, study abroad, trips with friends, etc. Decide who is paying for what, and make those expectations abundantly clear before your child steps foot on campus.
When your budget and spending expectations are clear, you can reverse engineer to save accordingly. You can use a college planning calculator to help you decide how much to save each month for your kid’s schooling. Once you have a number that works for you, set up automatic contributions to a 529 plan or alternative savings vessel to help turn that goal into a reality.
A College Savings Example
Let’s assume your child is currently 8 years old, and you have $0 saved for their college education. You have 10 years to save up, and you’re assuming a conservative annual investment return of 5% per year.
- Financial Commitment in 10 Years = $100,000
- Monthly Savings Requirement = Roughly $458 per month for 10 years
- Financial Commitment in 10 Years = $60,000
- Monthly Savings Requirement = Roughly $275 per month for 10 years
As you can see by comparing these two examples, creating a proactive college funding budget matters!
Empower Your Child With Financial Education
Time and time again, parents attempt to protect their children by sheltering them from the actual financial cost and impact of a college education. But as a parent, one of the best things you can do is give them the gift of financial education.
Whether they take a Dave Ramsey class geared toward high schoolers or you walk them through some basic financial budgeting books like YNAB, they must understand how money works.
Once they are grounded in fundamental money principles, they need to know how student loans will impact their financial life post-graduation. When the time comes, this knowledge will help them make smart decisions about where they end up attending.
There Are Loans For College, Not Retirement
It’s important to remember that there are loans for college, but not for retirement. If you can’t cover as much of your child’s education as you want to without derailing your retirement savings, that’s okay. You should prioritize your retirement savings, so you safeguard your financial future.
When push comes to shove, you will need the savings and cash flow when you retire, and there isn’t a “loan” for that. After all, if you’re a financial burden to your children later in life, did you really do them a favor by paying for college?
If you’re wondering how you can proactively plan for your child’s education without negatively impacting your own retirement, you’re in the right place. Get in touch with our team today and learn how we can help!
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article. All investment and financial planning strategies involve risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.