Securing Your Child's Future: Navigating Economic Uncertainty and Crafting a Comprehensive 2023 College Funding Plan

More than half of Americans say they want their child to attend a four-year college immediately after high school graduation, and another 16% envision their son or daughter taking vocational training.

Almost everyone believes higher education pays off, and in this case, they may be right. The Bureau of Labor Statistics (BLS) reports a direct correlation between higher education and income with professional doctorates earning the most, followed by academic doctorates, master's degrees, and bachelor's degrees. Associate and high school diplomas sit at the back of the pack. 

But higher education doesn’t always mean higher pay, and it isn't cheap.

The National Center for Education Statistics (NCES) states that in 2021-22, first-time, full-time undergraduate students living on campus paid $26,000 at public universities and $55,800 at private non-profit schools. That's a lot of money. Eventually, you'll probably have to pony up some of your child's education costs. How can you be ready for that?

In this article, we'll explore the real costs of college, when and how to plan for your child's education, and how to help protect your investment against economic uncertainties.

How Expensive is College?

On average, including tuition, fees, books, supplies, and living expenses, college costs $36,436 per year, according to the Education Data Initiative (EDI). Like all averages, though, this one may or may not apply to you. Many factors help determine a college's net cost, including its location, brand's prestige, whether it's public or private, and what kind of financial aid package it awards your student. 

As an example of disparity in pricing, consider that students at Kenyon College pay $66,490 in tuition alone while enrollees at New York's Boricua College pay only $6,025. 

You can't control how much your student's college charges, but you can make other decisions that can radically reduce your costs. For instance, your student could…

• Graduate in four years. This might seem like a no brainer, but just 40.4% of bachelor-seeking students do so. Less time in college means less money spent on college.

• Avoid student loans. Most students take 20 years to pay back their loans, which accrue interest over that time. Help your student carefully consider the amount of loans they take, if any, and do everything you can to help them understand the shackles of educational debt. 

• Maximize the value of community college. Two-year colleges cost 13% of what four-year colleges charge on average, and in some states, they are free. Use this to your advantage. Two-years at a community college and two at university can save you a lot of money, and your child's future employer will be none the wiser. 

• Minimize non-tuition expenses. Costs of living can vary greatly from region to region. If your student can live at home, you may want to consider that option instead of paying for a dorm room and a meal plan.

• Shop for your school. It may seem like a strange thought, but just like shopping for a new car, consider and compare the net costs of each school. After all, other than buying a home (for those of us living in California), college is one of the largest purchasing decisions most of us will make. 

EDI estimates that when you add up the actual cost of college, additional expenses, and loan interest, a bachelor's degree costs about $509,434. With careful planning, you can radically reduce that number.

When Should You Start Planning for Higher Education?

The sooner the better! In a perfect world, one might argue you should begin saving for college as soon as you know you're pregnant. Most people are more invested in buying diapers than stocks at that point, however, so college savings gets pushed aside. It's okay if you haven't saved anything yet. The point is — start planning right now. 

Planning doesn’t just mean saving and investing. Chances are you’ll be in some of your highest earning years when you kiddo goes off to college. So, you’ll likely use a combination of savings and cash flow to help pay for college, but when it comes to the savings and investing side, compound interest works best when it works longest. In other words, the more time your money is in the market, the more money it can make. 

For example, if you save $610 a month at 7% interest from the time your child is one year old until they go to college, you could have about $255,744 stashed away. But if you wait until your child is 10 years old to start investing, you'll only have about $87,397 even if you invest the same amount each month.

Start planning for college expenses now. 

Tailoring Your Investment Strategy to Economic Uncertainties

No matter how well you plan your child's college fund, though, your investments will be exposed to the volatility of market forces. Even if you choose a tax-sheltered investment vehicle, like a state-sponsored 529 Plan, your investment can rise or fall with the larger market. 

How much risk and uncertainty can you safely afford when planning for your child's future?

Many parents choose a set-it-and-forget-it approach to investing. That is, they buy a pre-packaged 529 plan that invests in high-risk, high-reward investments, mostly stocks, in the early years. As your child ages, the plan moves toward more conservative investments. Once your child is in college, the plan goes to the most conservative investments of all.

This investment approach, however, may differ depending on the plan. In 2022, for example, Missouri's 529 plan lost 14%, and Maryland's lost 7.25%. These states offered strategies, which were labeled “aggressive.” In addition to these strategies, though, they offered several other plans, including more conservative ones. Other states take a different approach. New York, for instance, only provides three options, and its most conservative track realized small gains in 2022.

You do not have to go with your state's plan. You can choose a 529 from any state. 

And remember that 529 Plans are not your only college savings option. In fact, just 33% of families use a 529 college savings plan to help with paying college expenses. Many parents hold their children's college funds in brokerage accounts or general savings accounts. A few opt for pre-paid state tuition plans or Coverdell Education Savings Accounts. 

Talk with your wealth management professional about which plan may be right for you and your child.

Accounting for Scholarships, Grants, and Financial Aid

An investment account or current cash flow isn't the only way to cover college costs. The rest of the money may come from financial aid packages that include a mix of scholarships, grants, loans, and work-study options.

Let's take a look at a basic financial aid package and how it could affect your college savings plan.

• Grants are need-based gifts of money that can help cover tuition and related expenses. The most well-known grant program is the Pell Grant. Students need to complete the FAFSA to find out if they qualify.

• Scholarships are competitive financial awards that help pay for college. About 60% of American families use scholarships — most of which are granted to the student by the university. Together, scholarships and grants provide $7,813 to the average student at a public university and $21,011 to the average student at a private university.

• Loans for education must be paid back with interest. The federal government subsidizes select student loans and offers other low-interest unsubsidized loans. Private lenders also provide educational loans. Student loans can be among the most cost-inefficient ways to pay for college.

• Work-study programs can help students fund their education with on-campus jobs. Both the federal government and colleges themselves offer work-study options.

Many students will receive one or more of the above financial aid resources, so parents, if they plan right, may not have to cover 100% of their child's college costs. 

FAQs About Funding Your Child's College Education

• Are 529 plans worth it? Only you and your financial advisor can answer this question for your family. 529 plans have existed since the mid-1990s, and roughly 20% of people saving for college are using one. Investors like the tax benefits, but the plans can be problematic if your kiddo doesn’t end up at college or if you’ve over-saved.

• Should I use my Roth IRA or a 529 for my child's education?

  We will quote financial expert Dave Ramsey on using your retirement investments to pay for your child's college tuition: "Don't ever sacrifice your retirement savings so your kids can go to college. There's no guarantee they will graduate from college, but we can pretty much guarantee that you'll retire—and likely sooner than you think." (Despite this wisdom, 21% of families use retirement savings for their child's college expenses.)

• What are some alternatives to traditional four-year colleges and universities that could impact my education funding plan? If your child chooses to attend a vocational or trade school, join the military, or undertake an apprenticeship, they probably won't use as much of your college savings.

• What happens to my 529 if a child doesn't go to college? It will cost you to cash out the account, but you can use a portion of it to pay off student loans, cover vocational school costs, or pay for another loved one's education.

• Can grandparents or other family members contribute to a child's education savings plan? Yes, anyone can contribute to a child's college savings account.

• Are there any tax credits or deductions available for education expenses? The IRS allows you to claim several educational expenses on your taxes. Talk with your wealth management advisor and your tax preparer if you think you qualify for any of these deductions.

Almost everyone wants to help their child cover college or vocational training, but it often pays off to plan ahead to make it happen. Not only do you need to make sure you've squirreled away enough to make a dent in your child's educational costs, but you also have to protect your own retirement investments while warding off larger economic hurdles. 

Do you want to talk with a wealth management professional about how to save money for your child's college? Give us a call to set up an appointment.