Back-to-school season is just around the corner. As August continues, your mind might be cluttered with school supply lists and meet-the-teacher events, but there’s an even more important educational preparation that could be sitting on the back burner: saving for college.
For many parents, college seems a long way off, but it’s never too early to start thinking about how you’ll pay for it. After all, most people buy life insurance to protect against potential risks, and many never cash in on it. More people are going to college these days, but most people don’t have a solid plan for how to fund it. Don’t saddle yourself with a sizable expense at the last minute; put strategies in place today to ease the financial burden tomorrow.
Here are four key questions to shape college-savings strategies for your student.
What are my goals for education planning?
How much do you wish to contribute toward your kids’ total college expenses? Some parents hope to cover 100 percent of the cost, so their children can focus on school. Others want their children to help pay for college and require they get a part-time job while attending class. There are many creative and flexible options in between as well. Regardless of the route you choose, it’s important to establish a goal and communicate those expectations as your kids plan their futures.
What are the different ways I can fund college?
Many people who can save toward college early in life will not qualify for Federal Student Aid by the time their student applies. And with administration and policies changing regularly, it’s an unwise plan to rely on significant government assistance. Therefore, I often recommend clients explore one of the following options to fund college for their children:
529 plans are a tax-advantaged way to save for education expenses. The recently enacted Big Beautiful Bill expanded the flexibility of what these accounts can be used for, which now includes credentialing, licensing and continuing education programs as well as broader K-12 education costs. Even if your child chooses not to go to college, funds can be rolled into a Roth IRA, and the money can be withdrawn if needed, albeit with tax implications.
UTMA accounts are custodial accounts designed to help adults save and invest money on behalf of minors until the assets must be transferred to them. Unlike 529 plans, these accounts are not required to be used for educational purposes. They can be used to save toward any large expense for the benefit of a minor, such as buying a car, a first home, a wedding, etc., but they lack the tax advantages of 529 plans.
Roth IRAs for kids can be opened and receive contributions if your children are earning income, such as farm wages. These accounts remain under an adult’s control until the child reaches the age of 18 or 21—depending on the state of residence—at which point it must be transferred to the child to continue its tax-free growth.
High-yield savings accounts, money market accounts and certificates of deposit can also be used to save for college, but be sure to research their minimum opening deposits, minimum balances, terms, interest rates and fees. Often, one of the other options listed above is more beneficial.
How will I balance paying for college alongside my other financial priorities?
It’s true that families have a variety of financial priorities and only so much income with which to save. From daily expenses and family vacations to paying taxes and saving for retirement, funding college can often become ‘tomorrow’s problem.’ When you break each expense into smaller goals, however, you can evaluate the pros and cons and consider the trade-offs you’re willing to make. That’s a huge benefit of having a financial plan—it allows you to gain clarity about your goals, dissect them into smaller, manageable actions and run alternate scenarios to make informed choices. You might decide after looking at your retirement savings that you can only responsibly commit to paying for half of your kids’ college rather than 100 percent, and in fairness to them, that’s a decision that should be communicated sooner rather than later.
As kids enter high school, are we on track?
As your student begins to think about where they want to go to school and what they want to study, you can determine a more exact figure for how much you need to save. Throughout high school, I recommend regularly analyzing how much you’ve saved compared to how much you need. Once the needs analysis identifies a gap to fully fund college expenses, we can discuss other methods to cover the rest.
How you plan for and communicate about paying for college is an opportunity to teach your children about stewardship. Education planning is arguably of more interest to them than any other aspect of financial planning, and it’s important to remember that they’re watching how you handle it. Is your approach to paying for college something you’d be proud to have them model?