College Savings

Saving for College: What You Need To Know

Recent data shows that a bachelor’s degree increases income 86% compared with a high school diploma. But it doesn't come cheap - the average cost of college in the United States is $35,331 per student per year, including books, supplies, and daily living expenses. Multiplied by four years per child, this is one of the largest expenses a family will incur.

As with pursuing any financial goal (new car, travel, new job, retirement, etc.), a bit of planning can reap significant rewards. Families that plan for college savings are better prepared for college costs than those without a plan. They tend to have more money saved and less debt from education expenses than those without a plan.

And we’re here to help. We love to plan!

What does it (and will it) cost?

If college seems expensive, it’s because it is. Tuition rates have grown an average of 5.9% per year over the past four decades. The chart below estimates the total four-year cost of an education based on a child’s current age and historical tuition inflation rates, for both public and private universities.

One important thing to keep in mind when you see these staggering numbers is that the average actual price paid for college is much lower.

We are excited to share some information, strategies, and practical support, no matter where you are in the process. Here are our three tips for your college planning and preparation:

Have the conversations, and be realistic

An often-overlooked first step is for parents to have conversations early on about how and what they would ideally like to contribute to their kids’ education. Unsurprisingly, there is a range of views on this, and it’s helpful to be clear and as aligned as possible on your goals and expectations.

Second, it’s important to look at what is feasible financially, particularly in the bigger picture of your financial planning. As you’ve likely already heard us say, there’s a reason flight safety announcements remind adults to put on their own oxygen mask first, before helping children.

You may want to include your children in some conversations too. It can be helpful to explain some of the benefits, costs, and considerations of a college education and selecting a college. It’s also great to talk about money to help kids prepare for college in other ways, in terms of managing spending, saving, etc.

There are many ways to support your children in paying for college while placing the priority on your retirement planning – these are not mutually exclusive! Our financial planning tools are very helpful in projecting retirement financial pictures, upon which we can layer in college funding scenarios. It can be helpful to visually see the impact of these expenses on retirement to help guide your thinking and preparation

Save and invest as early as possible

Save and invest as much as you can, as early as you can. Just like with retirement, the compounding of your early investments will do some of the heavy lifting for you.

Here are three of the primary vehicles for college savings and funding:

529 Plans

A 529 plan is a tax-advantaged savings plan designed to help pay for education. Savings grow tax-deferred, and withdrawals are tax-free if used for qualified education expenses such as tuition, fees, and room and board. The funds can be used at accredited schools throughout the U.S. and internationally, including vocational and trade schools.

Each state has its own 529 plan, so details can vary by state.Here is a link to the Oregon 529 website.Any adult can set up a 529 account (a parent, grandparent, relative, friend, etc.), and the child is set up as the account’s beneficiary. A child may have more than one account. The account holder contributes money to the plan, and can choose among the investment choices offered, typically a selection of mutual funds and target-date funds.

In most states, there are no limits on how much you can contribute to a 529 account each year, but there is a cap on how much you can contribute in total, or contributions are limited once an account reaches a certain amount (in Oregon, you cannot contribute to a 529 account if it is larger than $400,000).

What if your child does not end up needing all or any of the funds? One option is to keep the account for that child, as they may decide to attend college later or go to graduate school. Another option is to change the beneficiary to a relative – the account can be transferred amongst siblings, other family members, and grandchildren (even future grandchildren!). In the event that the beneficiary gets a full scholarship to college, the penalty for taking the cash is waived. Last but not least, you also have the option to cash out the account and pay the taxes and 10% penalty.

Custodial Accounts (UGMA/UTMA)

A custodial account, also known as a UTMA or UGMA account, is a taxable investment account that enables minors to save and invest. These accounts are managed and invested by an adult custodian (parent, guardian, relative, etc.) until the beneficiary is no longer a minor (age 21 in Oregon), and the account and assets are property of the minor. As such, the minor is also responsible for any taxes earned.

The benefit of these accounts is flexibility – the funds can be used for anything (spending money, college expenses, buying a car, down payment on a first home, etc.).

Financial Aid, Grants, and Scholarships

As you near the time of college, this becomes a more tangible part of your college funding picture. There are some great scholarship and grant search websites that we can recommend and there are also work/study programs, which are a form of financial aid that allows students to work part-time to help cover the cost of their education.

The FAFSA (Free Application for Federal Student Aid) is the form used to apply for federal aid. Applications open October 1, and is assessed annually, so must be completed each year that your child is in college. The FAFSA takes into consideration both parents’ and students’ income as well as non-retirement assets such as 529 plans, taxable investment accounts, savings accounts, etc. Retirement accounts (401(k)s, IRAs, 403(b)s, etc.) are not included in the calculations.

Do the best you can

If you could know exactly where your kids were going to college, how much tuition there would be, if they will receive any grants, scholarship, or aid… planning would be much easier! Of course, none of these things are knowable until your child’s senior year of high school. While there are many unknowns, there are still many great avenues for saving in preparation for whatever the future holds.

One thing we do know: Families that plan for college savings are better prepared for college costs than those without a plan. Research shows that families with a plan are expected to have 47% less student loan debt and to have 2x more money saved for college than those without a plan.

Wondering how much to try to save? As a general guide to be on track to cover 50% of the cost of attending a four-year public college, multiply your child’s current age by $2,000 and aim to have that amount of college savings by that age.

Don’t have that much saved? Don’t worry. It is never too late to start and there are multiple ways to finance and support your kids through college. Student loans are often part of the equation. According to the Federal Reserve, the average college debt among student loan borrowers in America is $32,731. Most families finance college with a mix of multiple income sources, and the chart below may help level-set some expectations. 

So, the most important thing is to do the best you can. Set up that automatic monthly contribution to a 529 plan or other investment account. If you’re already doing that, bump up your contributions annually, or whenever possible.

College savings is just one component of your financial picture, and financial preparation for your retirement should be your top priority. Through our financial planning process we model out your holistic financial picture, and layer in college savings planning and expenses. Education is important to us, and it’s something we love helping our clients with.

Please reach out if this is something you'd like to dig into in more detail together!