The average cost of tuition and fees for the 2023–2024 school year was $10,662 for in-state residents at public colleges and a whopping $42,162 at private colleges. Yet, by taking a few key steps, you will find many practical ways to prepare financially for the college education of your children. These strategies can include creating a budget, exploring scholarship opportunities, saving early and understanding costs. A financial advisor can also help you create a financial plan to manage all of your college savings options.
1. Open a Tax-Advantaged 529 Plan
Engaging in a 529 plan, a tax-advantaged savings plan intended to encourage saving for future education costs, can be integral to your overall financial plan. Financial advisors can provide expert advice on whether this is a suitable saving plan for your circumstances. Named after Section 529 of the Internal Revenue Code (IRC), this plan is sponsored by states, state agencies or educational institutions and provides a systematic approach to saving for college over time. Plus, you can now roll any unused funds over to a Roth IRA account after your child’s college is paid for.
2. Create a College Budget
To gain control of your finances and make informed decisions about saving and spending, budgeting is crucial. It can be the difference between having enough to cover all four years and running out of money after just one. Here are five common things you need to account for:
- Estimate the education costs, which include tuition, books and housing.
- Identify your income sources and track your monthly expenses.
- Evaluate your child’s potential spending habits to identify where you could save more.
- Identify how much the living costs could be offset by your child working a part-time job while in school.
- Take into account inflation and potential changes in the costs of college over time.
Remember, it is beneficial to save where possible, but one should avoid assuming that every dollar saved today equates to a dollar less to borrow tomorrow.
3. Invest in Potential Scholarship Opportunities
Scholarships can significantly lighten the financial load of college expenses, making it necessary to explore these opportunities. The key is to start your search early, apply for multiple scholarships and comply with each scholarship’s unique requirements. Additionally, as your child develops a skill in a sport, musical instrument or other endeavors, consider cultivating that talent so they can have a shot at more scholarship opportunities.
4. Save Money Every Month From Birth
Saving early can significantly increase the final amount due to the power of compound interest. For example, saving $200 per month from birth at a 6% interest rate could give you a total of $78,058 by the child’s 18th birthday. But remember, this is just a mathematical probability. Actual results may vary based on many factors, including market variability. The important factor is that you’re saving and investing for your child’s future as early as you can work it into your own budget.
5. Understand Future College Costs
Online calculators that factor in current costs, the child’s age and the expected rate of inflation can provide an estimate for future college costs. College tuition and other costs have only increased over the last 20 years, so it’s likely that they might continue to go up over the next 20. This is something that many parents don’t account for, which can end up costing valuable time and money, and put them at risk of falling short.
6. Know Financial Aid Guidelines and Possibilities
Understanding financial aid guidelines and possibilities can help determine whether you qualify for assistance. Your child might be able to access grant money or even borrow what is needed to offset what you’re able to save if that structure makes sense for them. Some guidelines will limit their ability to receive funds based on your income as a parent and financial situation. These guidelines can change over time so it’s important to stay up to date with what your child might be eligible for, and what the requirements are for you and them.
7. Get Your Child Involved in Saving
Your children should get involved in saving for their own college, once they reach an age where it makes sense. Involving them in financial planning is beneficial as it can potentially instill saving habits and develop financial prudence that might assist them in the future. One way to do this is to get your children involved by saving part of an allowance, or helping them create a budget once they are old enough to get a job.
8. Check Your College Savings Annually
Reviewing your college savings annually will help you ensure that are on track with your goals. Understanding where your savings account is currently and comparing it with what you potentially need to have in the future, will help you adjust your investments and make prudent decisions to save more as you need to.
Bottom Line
Planning for your kids’ college expenses could feel daunting. However, appropriate planning and discipline, coupled with expert advice from a financial advisor, can make it manageable. Nevertheless, remember that your success in reaching your college education goal will depend on your specific finances. So make sure you plan accordingly.
Tips for Saving for College
- A financial advisor can help you estimate how much you need to save for your child’s college and then help you get there by making the right financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re curious about opening a 529 plan for your child, consider checking out the one that is managed in your state, or shop around for the right plan for you.
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