When you have kids, at some point you think about saving for college. Whether they are babies when you think about it or when they are about to enter high school, the thought of how to pay for college usually crosses parents’ minds. As life goes on, saving for college is one of those financial “to-dos” that may get pushed to the bottom of the pile. Not necessarily on purpose, but life happens. Other more significant priorities can come along like buying a house, finding a new job, moving across the country — the possibilities are endless. Regardless of how old your children are, it is better to start understanding how much college is going to cost you and what you can do about it now.
Tip #1 – Figure Out How Much College Is Going to Cost You
Figuring out how much college is going to cost you can be tricky. It’s not just a matter of multiplying tuition costs by four years (I would build in 5 years to be safe). Parents need to know the cost of attendance (COA). The COA is not only the tuition but everything else that goes with it – room and board, books, fees, etc. For example, tuition at the University of California, San Diego, is about $15,000 if you are a resident. However, the COA is more along the lines of $34,000. Now, you can multiply that by 4 or 5 years if you have a junior or senior in high school, but most people want to know what it will cost them long before their kid is a junior or senior. The projected costs of COA not only include the number of years you think your child will need to graduate, but also a 5% inflation rate. So, if your child is 10 (like my youngest son, who will not start college for another eight years), what does that look like? Many parents think that the number is astronomical that there is no point in finding out because there is no chance they would be able to save out of pocket for college. To a degree, I can agree – it’s intimidating and a little soul-crushing. BUT – ignoring it will not make it go away. The ballpark figure needs to be part of a family’s overall financial plan because some parents will be closer to retirement by the time their first kid goes to college. Parents are better being informed now than surprised later.
Tip #2 – Start the Process Early As Possible
You can never start saving too early for college. I have heard of people starting to save in 529s while their child was in the womb (yes, you can do that). In terms of how much to save, you save what you can when you can. Even something as small as $100 a month in the beginning, and upping your amount will give you something to use when sending the kids to college. Life happens, and most brand new parents have many expenses they have to get used to. So in the early years, you do your best. But as time moves on, you want to structure your savings plan for college to increase. Another effective way to save for college is if you have an unexpected influx of cash – throw some of that money into the college account. The trick is knowing what savings vehicles to use for college and when – there are many strategies and tools out there.
Tip #3 – Understand the Different College Savings Accounts and How They Can Be Used
There are several college savings plans and vehicles that parents can use when planning for college. However, the most popular savings plan for college is the 529. The 529 is a college savings account that can only be used for qualified educational expenses per the IRS. In addition to saving for college, parents may receive a tax benefit depending on what state they live in. The downside to the 529, is when the time comes to value the parents’ assets, this account is counted against the family. In addition to 529s, there are Coverdell Education Savings and UGMA/UTMA accounts. Each one of these accounts have particular rules on how much you can contribute, what you can spend it on and how/when you can spend it. It is key for parents to understand how each of these savings accounts work before they put money into them. But these are only a few tools to save for college.
Tip #4 – Leave No Stone Unturned
What if you didn’t get a chance to save anything for college? How are you going to pay for college without any savings? Or you were able to save a little bit, but not enough to make a dent in the daunting cost of college? That means we have to get more creative about where we find money for college. What does your budget look like now? Can we tighten the belt and squeeze more out of it? What other assets do you have? Assets include everything from bank/brokerage accounts to property. Are there any other resources that may be used? Maybe the grandparents started a 529 without telling you? The idea here is to leave no stone unturned. In addition, it’s time to start exploring financial aid resources. There are scholarships that kids can apply to even as elementary students. One of the more well-known scholarships is Doodle for Google. Check it out here.
Tip #5 – Learn the Language Of Financial Aid
Financial aid is arguably the most convoluted topic of saving for college. Financial aid consists of two types of aid – scholarships/grants (read: free money) and student loans (read: not free money). Eligibility for financial aid starts with filling out the Free Application for Federal Student Aid (FAFSA). Once you have filled out the FAFSA, you will receive a Student Aid Report (SAR) indicating what your Expected Family Contribution (EFC) will be based on your answers to the FAFSA. One thing I hear all the time is why should we fill out the FAFSA — we won’t get any money anyway. There are many factors that go into the FAFSA that unless you know exactly how they are calculated, you may still be eligible for something. Something is better than nothing. Also, schools look at the FAFSA to determine not only need, but whether your child may be eligible for scholarships from the institute directly, not only federal money. In addition to the FAFSA, some schools will ask for the College Scholarship Service Profile (CSS Profile) that will dig further into your finances to see what you can and cannot afford. Learning the language of financial aid and how it works can supplement your ability to pay for college, especially if you haven’t saved.
Tip #6 – Engage With a College Planning Consultant Who May Not Be Your Financial Advisor
Many families have their own financial advisors, and ideally, those financial advisors have experience with college funding. However, there is a difference between college funding and paying for college. College funding refers to how much you have saved over the years for your kids’ college education. Paying for college in the most efficient way is a different skill set and may not be in the financial advisor’s wheelhouse. When it comes to understanding how to pay for college, there are many factors that go into it, even if you have the money. There are different strategies to be considered. I encourage parents to talk to their own financial advisors, but if you need more clarification on how the entire process works, including the most efficient way to spend the money on college, reach out to a college planning specialist.
Getting on track to save for college can happen at any time. The more time you have to save and prepare, the easier it will be to strategize paying for college. However, just because you are starting later in life or you don’t have anything for college doesn’t mean that your child has to forgo college completely. There are plenty of strategies and paths to take to make college affordable. In 2019 – 2020, there was $183.8 billion available for student financial aid. The trick is to make even a little bit of that money apply to your situation.
Finding a college financial specialist doesn’t have to be complicated. I help clients by creating financial roadmaps for college to get them on track fast for success. Contact me today for a free consultation and learn more about why my clients use me for all their financial needs.