College is Attainable with the Right Plan

Can your family afford college at today’s rapidly increasing costs? Tuition is high and will only get higher, even for families with meaningful assets. The good news: College is attainable with the right financial plan. This article guides parents and children on how to create a winning strategy.

Why Planning for College Expenses Matters

Why plan for college even if your child or children are years away from entering higher education?

College costs continue to rise. We know you want the best for your children, but their future comes with a growing price tag. Tuition doesn’t stagnate. Here’s an example: In 2000, the average annual cost of a private four-year university in the United States was about $14,616. Today, 25 years later, expect to pay about $40,500 annually.

The cost trajectory of in-state public universities has been similar. Yearly tuition, which cost approximately $3,349 in 2000, now averages nearly $11,000. Out-of-state public universities are even higher. The annual tab now exceeds $49,000.

These examples include tuition, books, on-campus food, and housing.

Higher costs highlight the need for a well-thought-out long-term investment strategy. You’ll need an investment strategy that includes a growth component that fits your investment risk profile. Growth-oriented investments, like equity funds, offer the potential to outpace rising expenses.

Planning for college must be part of a comprehensive financial plan. Don’t neglect broad goals like retirement, tax, estate, and legacy planning. While planning for the cost of college matters, you must ensure that your college savings plan aligns with your long-term financial strategy.

Start Early

We’ve established that the cost of college can be painful, but time and compound interest are your friends.

Invest regularly. An initial step is to set aside and invest a specific amount each month for college, because compound interest helps your money grow. Some of our clients save $300 or more each month and invest like clockwork for 18 years, starting when their baby is born. At $300 per month, they would have contributed $3,600 per year, or $64,800 over 18 years. With the benefit of compounding at an annual six percent rate of return, their investment would have grown to $117,086.

Invest more. Increase your monthly contributions from $300 to $500 for 18 years, and your total investment could grow to $194,145 at six percent yearly. That’s nearly $77,000 more than the $300 monthly program for 18 years. Some parents may increase their monthly contributions over time or add a substantial lump sum.

Invest any time. It’s never too late to create a smart college funding strategy. Parents who start later can still build a substantial sum to pay for college expenses. Let’s say you begin seven years before your child heads off to college. You may need to invest more, say $1,000 each month, comparable to the payment of many luxury cars. In seven years, a $82,000 total investment could grow to $105,594 at a hypothetical annual rate of six percent.

As we always say, past performance does not guarantee future similar results.

Seek the Best Financial Aid

Many college students receive some form of aid.

To apply for aid, parents or guardians must fill out the Free Application for Federal Student Aid (FAFSA) form. The form is needed for all students seeking federal financial aid, grants, loans, and work-study programs.

Merit and academic scholarships. Many children qualify for scholarships based on merit, leadership, and academic achievement rather than their parents’ income. Businesses, foundations, and the government offer thousands of scholarships. Noteworthy online research resources include Fastweb, BigFuture, Scholarships.com, and Scholly.

Athletic scholarships. Despite the high visibility of sports, athletic scholarships are relatively rare. Only about two percent of high school students get them. The majority are partial scholarships for tuition, housing, and food.

Grants. Grants are based on academic merit, as well as artistic and special talents. Unlike loans, grants don’t need to be repaid.

Loans. Parents often go to their local bank or credit union for loans. The Department of Education and Sallie Mae are also in the student loan business. Government loans usually offer lower interest rates compared to private lenders. In either case, know what you are paying for. A $200,000 loan repayment for a non-STEM or less-than-practical degree may be a poor return on investment.

Work study. Work-study programs provide part-time employment to qualified students. Jobs are often on campus in offices, libraries, and dining halls.

Part-time employment. This may be the best approach for many students. Part-time jobs teach them character, personal responsibility, and work ethic.

Invest in Tax-Advantaged Accounts

Not paying taxes on an investment for up to 18 years can compound dollars quite nicely, and there are various ways to take advantage of this compounding.

529 College Savings Plans. 529 plans have become quite popular. Why? Investments in a 529 grow tax-free. Parents can use the funds for qualified education expenses, such as tuition, books, on-campus housing, and food. You won’t pay taxes on withdrawals. However, you’ll pay taxes plus a ten percent penalty if you make improper withdrawals from a 529 plan. Some states offer tax deductions for 529 contributions.

Coverdell Education Savings Accounts. Coverdell’s offer tax-free growth for qualified expenses, plus you can invest in a variety of options. However, the annual contribution limit is only $2,000, and funds must be used by age 30.

Custodial Accounts (UGMA/UTMA). The positive: You save for college expenses with no contribution limits. The negative: the more money you have in a custodial account, the less financial aid you may get. Custodial accounts are also irrevocable and become the property of your children at ages 18 to 21, depending on the state.

Roth IRAs. Roth IRAs are another tool to consider. You get tax-free growth and can withdraw your contributions at any time. But contribution limits are lower than 529 plans; earnings withdrawals before age 59½ or prior to holding the account for five years may trigger penalties; and income limits restrict eligibility.

Trusts. Parents can set up a trust specifically for educational purposes. You protect your assets from creditors, control the timing of distributions, and potentially reduce estate taxes.

Involve Your Children in the Process

Engaging your children in the college planning process can help them achieve their goals.

Teens should have skin in the research game. While many kids do their due diligence in choosing a school, few bother to study and research scholarships, grants, and work-study opportunities. Encourage or require them to do their due diligence.

Kids should know how much college costs. As a parent, one responsibility is to talk about college costs with your children. If you haven’t already, teach them about the numbers. They should know about budgeting and how to make informed decisions.

Common Questions About Planning for College

How much should we save?

The amount you should save will depend on your goals. The cost will also depend on the type of school (private or public), location, and the number of years to attend. Some couples we work with want to pay the full cost of their child’s (or grandchildren’s) education. Others, not so much. We can help with the math so you know how much you need to save. Online calculators also help.

What if my child doesn’t go to college?

We see this occasionally. Parents save a considerable sum for college, but their children may have other plans. Some may prefer to attend trade school, learn by working, start a business, or travel. Others prefer a gap year. For parents, money saved and earmarked for university may also be used for vocational school. Plus, you can transfer the funds to another family member.

What if I have several children going to college at the same time?

Many of our clients have two or three children in undergraduate and graduate school simultaneously. Creating and following a comprehensive financial plan is a great start. Budgeting is crucial. Consider starting separate 529 or other tax-deferred plans for each of your children. Look into less-expensive in-state colleges. Some schools have family tuition discounts.

A Winning Strategy to Afford College

You’ve built your success by making smart decisions and seeking expert advice when needed. There’s no need to do it alone. A financial planning professional can help you:

• Clarify your goals and priorities
• Start saving early
• Seekthe best financial aid
• Invest in the proper tax-advantaged accounts
• Involve your children in the process

With the right financial plan, resources, knowledge, and support, college is an achievable goal.

Glassy Mountain Advisors takes a personal approach to financial planning. We are committed to helping affluent families create their own special memories, achieve financial peace of mind, and avoid financial pitfalls.

Ready to get started? We are here to help.

Schedule a complimentary financial planning discussion to learn more about how to make college attainable for you and your family.

Want to learn more about Glassy Mountain Advisors? Click here to find out more.

Glassy Mountain Advisors does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty. Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met: 1) must have owned the 529 plan for 15 years, 2) can only convert funds that have been in the 529 plan for at least 5 years, 3) rollover amount cannot exceed $35,000 and 4) rollovers must be made to a beneficiaries Roth IRA.

This blog contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this blog will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Glassy Mountain Advisors does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.