Prior to transitioning into the field of financial planning, I spent fourteen years in higher education – the first seven in admissions and enrollment. Countless conversations with families focused on affording the costs of college. I remember many of those moments – the faces, and the emotions. Some of the memories are celebratory and some, less so. Most of those celebratory moments were the results of planning and years of saving.
Parents face the challenge of saving for their children’s college education while they may be examining other financial priorities – paying down their own student debt or building a retirement nest egg. While it is imperative to focus on your own financial health, many parents are equally concerned about funding higher education for their kids. Where do you begin?
Consider the following tips as a starting point:
- Determine your goals. When identifying your goals, prioritize and make informed savings decisions. How much do you want to contribute (or not) to your child’s education costs? Do you want to pay for four years of undergraduate study? How much should you commit? When would you like to retire? The answers to these questions will help you create a path to achieve the desired results.
- Build a plan. As the French writer, journalist, and pioneering aviator Antoine de Saint-Exupéry once said, “A goal without a plan is just a wish.” Once you have your goals, you can back into your plan. For example, if I have a goal to have $100,000 for education in eighteen years, it requires a monthly contribution of $233, growing at a 7 percent annual rate of return, to hit my target. If I can only contribute $50 a month, achieving the same 7 percent annual rate of return, I have approximately $21,500 in eighteen years. Every step, no matter how small, can help make future decisions easier.
- Discuss the financial costs of education with your child. When the time is right, allow your children to be part of the process. This could be as early as middle school, depending on your child. Outline the costs of the schools and paths they are considering and look at all the options: community college, in-state public, out-of-state public, private, trade school. From the start, be clear on how much you intend to contribute – whether you plan to cover it all, none, or a set amount. Walk through the financial aid process together.
- Dedicate time to research the financial aid process and your options. Start by completing the Free Application For Student Aid (FAFSA) at studentaid.gov. Connect with the financial aid office at each institution and walk through the financial aid process. Go beyond the sticker price of the institution and use the Net Price Calculator on each college and university’s website to get a general idea of the costs. While it is a generalization, they are designed to show which grants and scholarships a student may receive. This is a good time to talk to your child about what it might take to receive grant and scholarship money and the value of focusing on academics.
Which comes first – saving for retirement or education?
While many of us think about opening that 529 account while we are driving home from the hospital with our newborn, it can get delayed. I mean seriously, new parents have a lot to do for goodness sakes! As your time horizon narrows, which should come first – funding your child’s tuition or your own retirement? The answer depends on your situation, but there are factors to keep in mind.
In most cases, saving for retirement should take priority over saving for your child’s higher education. To understand why, consider the following:
- You may not get to choose your retirement date. There are scenarios that could unexpectedly accelerate your retirement date, leaving you with less time to save than you were counting on. What if you become injured or disabled, need to care for an aging parent, or are laid off from your job?
- You can’t finance retirement. As a college student, your child may have access to scholarships, grants, loans, or other financial aid to help pay the bills. The same isn’t true for your retirement. If your nest egg comes up short, you may need to work longer, reduce your living expenses – or perhaps both – to make ends meet.
No matter your financial situation, know that it is possible to make meaningful progress toward both goals, particularly if you are intentional about how to allocate your savings. Consult a financial advisor and tax professional if you want help setting specific savings goals and understanding the various investing options available to you.
