By Dave Coen
The price of college tuition has doubled in the past 30 years. (1) And despite its hefty price tag, a college degree is necessary if you want to earn a decent salary and progress in your career. As a parent, you know this. That’s why you want to make sure your child can earn a degree without racking up a ton of debt in the process.
Today we’ll talk about 4 essential questions you should ask your financial advisor about college planning. These questions will help you figure out the best way to save for the outrageous price of college without jeopardizing your own financial plans.
Question 1: How Much Should I Save?
The current average cost of college tuition, fees, and room and board on the low end is $21,370 for a public in-state college. For a private college, that price jumps to $48,510 up to $75,000. (2) This is just for one year of school. If prices continue to rise as they have, in 10 years college will cost anywhere from $37,508.25 to over $100,000 per year. (3)
The amount of money you save for higher education is largely dependent on the type of school your child plans on going to, how much aid they’ll receive, and how much you want to contribute. Do you want to pay for all their expenses? Just tuition? A financial advisor will ask you these questions and then help you land on a savings number that’s just right for you.
Question 2: What Plan(s) Can Help Me Reach My Savings Goal?
Usually, when you think of saving for college, the only account that comes to mind is a 529 plan. But did you know that normal 529 plans may actually increase your out-of-pocket costs for college? It’s true! This is one reason why we always encourage parents to choose a college savings plan with the help of a financial advisor who can go over all your plan options.
Here are 6 other plans you may not have thought of:
- Educational Savings Account (ESA)
- Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account
- Roth IRA
- Savings account
- Taxable investment account
- Educational trust
- High cash value whole life policy
Each of these have their own positives and negatives so it is important to understand the consequences of saving in each vehicle and how that fits in with your individual family goals.
Question 3: How Do I Save Without Jeopardizing My Retirement?
Over 50% of parents would rather dip into retirement savings to help their child pay for college than have them take out student loans. (4) This is a noble thing for parents to want to do, but it actually does more harm than good. Your child can borrow money for college. You—on the other hand—can’t borrow money for retirement.
Balance college savings and retirement by paying yourself first. Contribute the maximum amount to your 401(k), pay off high-interest debt, and build an emergency fund. Use the leftover money to save for your child’s future.
Question 4: What Happens To Our Savings If Our Child Doesn’t Go To College?
This is a valid question for many families and relates to the type of financial vehicle you used to save money into for college. Do you have the flexibility to take out funds early in case of an emergency? Can you use the funds for tax-free retirement if they’re not used for college? The answer to these questions is, it depends.
If your money is in a 529 college savings plan, you’ll only be able to use it for secondary educational expenses (this also includes private high school, trade school, vocational schools, and two-year degree programs). (5) The rules are strict with this plan, but it comes with major tax benefits.
On the other hand, if you park your money in a taxable investment account, you can use the money for college or any other financial goals. You don’t get the tax advantages that come with traditional college savings plans, but you do get added flexibility. Of the 7 plans mentioned, each one comes with its own benefits and options.
How We Help With College Planning
College may be brutally expensive, but there are many ways to prepare for it. At College Planning America, we help families maximize their financial aid options, minimize out-of-pocket costs, and structure their finances to plan for college without jeopardizing their retirement in the process. Want help developing a college savings plan that’s perfectly aligned with your financial plan? Get started by emailing me at dcoen@sageviewadvisory.com
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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Registered Representative with Cetera Advisor Networks LLC, Member FINRA/SIPC. Advisory services offered through SageView advisory group, LLC. Cetera is under separate ownership from any other named entity. CA insurance license #0G82578
This material is designed to provide accurate and authoritative information on the subjects covered. It is not however intended to provide specific legal, tax, or other professional advice. For specific personal assistance, the services of an appropriate professional should be sought. Before investing in a 529 Plan, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.
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(3) https://www.northwesternmutual.com/life-and-money/how-much-college-will-cost-in-5-10-and-15-years/
(4) https://www.cnbc.com/2015/05/28/save-for-college-without-hurting-your-retirement.html
(5) https://www.schwab.com/resource-center/insights/content/529-account-what-happens
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