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How Much Should Parents Save for College?

Sep 25, 2023 Investing & Portfolio Strategies

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*The following article was contributed by Ann Garcia, CFP®. Follow Ann on Facebook at The College Financial Lady.

Going to college represents a coming of age as our children move into adulthood and start the next chapter of their lives. Watching a child walk to receive their diploma wearing a cap and gown is a dream come true for many parents.

Understandably, many parents want to do anything they can to set up their child for future success. But with university costs growing increasingly expensive, building up the savings to see them walk across that stage can feel overwhelming or even impossible. Furthermore, in focusing on the financial aspects of college preparation, many parents overlook the parenting and emotional aspects that impact a child’s academic success.

As both a parent and a financial advisor, I consult with people all the time about how they can prepare for their child’s college education. Parents always want to know how much to save for college and whether it’s worth it.

In the most recent episode of the “Off the Wall” podcast with Monument Wealth Management, I had the opportunity to answer these questions to help parents think about their college savings plan.

Is Saving for College Worth It?

With the cost of tuition on the rise, many parents wonder whether sending their child to college is even worth it. Learning a trade can be less expensive and still promises good job security, but college grads may have an easier time making a living.

The truth? Yes, college is still worth it!

According to research, college grads earn an average of $1 million more over a lifetime compared to their peers without degrees. Not to mention, they are less likely to experience unemployment as their skills are also in demand. Unemployment is typically about half for college grads compared to those who don’t hold a degree.

But university learning is about more than economic stability. Studies show that college grads are more likely to live a healthier lifestyle with less heart disease and fewer instances of type 2 diabetes. They even tend to be more successful relationally and are less likely to experience divorce.

Fostering Your Child’s Mindset

What parents often don’t realize is that preparing for college is equal parts financial and parenting. While you must be financially savvy to see your child through higher education, you also must connect to a deeper motivation that ensures your child understands and receives the full value of higher education.

The best thing you can do for your child is to support them in their decision-making when it comes to choosing their path in life. Introduce them to the idea of college young and present it as a place where they will gain valuable experiences, learn new things, and make lifelong friends. This way, they will grow up with an innate understanding of its value and importance.

In the years leading up to college, it’s crucial that you listen to your child, take note of their strengths, interests, and pace, then aim for a balanced approach to academic challenge. Don’t push your children too hard, as it may backfire on you. Without the ability or interest to excel at high-level classes, your child may struggle to perform even when they could have excelled elsewhere at a place in line with their interests and abilities.

From a logistical standpoint, this can impact their ability to earn merit scholarships. If you pressure your child into a challenging class they are not prepared for (such as AP, IB, or dual enrollment courses), they may receive lower grades that negatively impact their GPA. By extension, this can affect their likelihood of earning merit scholarships at universities that look at unweighted GPAs.

This isn’t to suggest that your child should only take easier courses. Rather, it’s about balancing that level of challenge in a way that supports, encourages, and benefits your child instead of frustrates and demotivates them.

In addition, the level of challenge will play a role in their confidence. A child who struggles in school may start to adopt a negative self-image when comparing themselves to their peers. It may even sour your relationship with them as they harbor resentment for being forced into classes that have caused them so much stress and unhappiness.

How Much Should You Save for College?

Should you save for public school or private school? The cost difference can be quite stark, ranging from $30,000 per year for public to $70,000 per year for private. The question of where to aim is one that I hear over and over again from parents.

The goal is to find a savings rate that you are comfortable with.

According to the Gallup Purdue Index, the feeling of success had nothing to do with what kind of college a student attended. Private, public, Ivy League, or community college – it was all the same. Instead, that feeling of success had more to do with the availability of opportunities and mentors. In other words, it was all about the experience the child had.

The bottom line is that you don’t necessarily need to save enough for an Ivy League school in order to support your child. Your child will have many fantastic opportunities at whatever savings rate is right for your family and situation.

To start getting a sense of how much you need to save, you can explore tuition costs using the net price calculator available on most college websites. It allows you to type in family financial details and may even have a section for student academic information. This can provide a cost estimate for college. Young parents may want to look at the net price calculator for their own alma mater to see what they should save.

Keep in mind that most colleges offer scholarships based on financial need or merit such as GPA or test scores. These can offset some of the out-of-pocket costs of higher education.

When your children are old enough to start narrowing down their options, frame the financial aspect in a positive light rather than as a limiting factor to their success. Rather than broaching the topic by saying, “We only have enough saved for public school, so you must pick a public school,” you can try a different approach.

Instead, reframe the topic to something along the lines of, “We think it’s really important for you to graduate debt-free, which will set you up for success in adulthood. We’ve already saved enough for the public in-state college, but you may be able to find other options with the same budget and we will support you.” This angle makes them feel supported and empowered when it comes to their decision, rather than held back by financial limitations.

Tips for Saving for College

How can you start saving for college early, knowing that it can be quite expensive no matter which school your child selects? Here are my top tips to help parents put together the financial piece of the puzzle.

Start Early

Saving earlier is much easier than saving later. The more time your money has to compound, the greater its future value will be – and that growth over time is essentially free money. Even if you are financially strapped in your child’s early years, create a college savings account and make contributions when you can, even if it isn’t much.

The truth is that something is better than nothing, and every little bit can help. Research shows that students whose families have saved for college enroll and even graduate at better rates than those who don’t – even with as low as $500 in college-designated savings.

One simple strategy to set up automatic transfers or direct deposits at some affordable amount. Even if it’s just your plan’s minimum (which is typically $15 or $25), those incremental savings will add up over time.

Reassess the plan occasionally to determine if you are able to adjust your contribution. I recommend doing this once a year during your child’s birthday month, as it’s an excellent time to reflect on the future you’re trying to build for them.

Understand Your Saving Options

Gone are the days when you had to squirrel away money in a typical savings account for the day you drop your child off at their dorm. Now, you have multiple college saving options, and it can help to understand what’s available to you. Here are three of the most common savings vehicles available for parents:

  • 529 Savings Plans: The more general 529 savings plan is a state-sponsored option that allows you to withdraw funds tax-free for qualified education expenses including tuition, room and board, or even textbooks. If your child decides to forgo college or has surplus funds in the account after graduation, the 529 can be rolled into the beneficiary’s Roth IRA. This offers flexibility and can give your child a head start on their retirement savings.
  • Prepaid Tuition 529s: These accounts enable you to prepay for tuition based on today’s rates. This allows you to lock in the price now, knowing that prices are steadily on the rise.
  • Coverdell Education Savings Accounts (ESAs): A Coverdell ESA is similar to a 529 plan, allowing you to make tax-free contributions and tax-free withdrawals for education expenses. They can be used for both higher education and K-12 expenses.

For a more in-depth look at these college saving options, check out: What Are My College Savings Options? – Answers from a Private Wealth Advisor

Friend and Family Gifting

Instead of asking for gifts for your child at Christmas or even their birthday, you can ask friends and family to make a contribution to a child’s 529 account. Especially when they’re young and already have too many toys, this can be a way for the generosity of others to put your child on the path to future success without much sacrifice.

Don’t Sacrifice Elsewhere

While college savings is important, it shouldn’t come at the cost of other financial goals like saving for your own retirement. If you aren’t contributing to retirement, you shouldn’t be contributing to college sayings, either. Emergency savings should be your first priority followed by retirement savings.

Ideally, you strive for a balance that lets you save toward retirement and college. One rule of thumb is to contribute 90% of your savings capacity toward retirement and the remaining 10% toward college. Any “extras,” like tax refunds, bonuses, gifts, and so on, can also go toward college savings.

Once you are maxing out retirement contributions, then you can look at the budget and start putting more toward college. Target your state’s deductible amount, which varies by state.

Final Thoughts

Figuring out how much to save for college is just one piece of a larger financial puzzle. Remember that the ultimate goal is about more than finances – it’s about preparing your child for future success. While saving for college is certainly a financially savvy move to support your child as they move into adulthood, fostering the right mindset is just as important.

This article was contributed by our podcast guest, Ann Garcia, CFP®

How Does College Savings Fit into Your Family’s Overall Wealth Plan?

Saving for college is no small feat – especially if you want to prepare those finances without sacrificing your family’s emergency savings or future retirement plans. Sitting down with people who listen can help you see the bigger picture and gain clarity on the best path forward.

At Monument Wealth Management, we work with you to create a personalized Private Wealth Design that considers your full wealth picture, including both personal and business finances, retirement, tax efficiency, estate planning, and college savings. Instead of guessing where, when, and how much to allocate toward your savings goals, our team can guide you through the intricacies and help you design a wealth plan that is truly tuned to your unique priorities. See if we’re a fit in 30 seconds!

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