Regardless what age your child is, funding higher education is something you should be thinking about now. With the cost of higher education growing between 2 to 4 percent per year for the past 10 years, it’s best to start as soon as possible. This expense can be daunting, but with a little planning and some practical wisdom, your child can have a great education and pursue their path to career success.
Higher education can take many forms. It may be a 4-year degree at a college or university, it may be a trade school or an apprenticeship, or it may be entrepreneurship. Regardless of which one your child chooses, preparing for the cost should be done intentionally and within your ability. In other words, decide what you can do and start taking action now.
How to prepare for college expenses
1. Determine how much you can contribute
Ideally, we’d all like to fund our children’s higher education in full, but that may not be possible. Some parents will need to have their children cover some of the cost. Room and board, meals, books, fees, and transportation can be covered by the student through a part-time job, or a school work program.
Putting off college for a couple of years to work full-time and save for education is also an option. This, in my opinion, should be seriously considered, especially if the child isn’t sure what type of career they want to pursue.
I personally took a break between high school and college, and it proved to be very beneficial. Not knowing which path to pursue, I got a full-time entry-level job. One year of working in the real world helped me to understand the value of higher education, and to commit to it wholeheartedly.
That’s the kind of focus we want for our children when we invest in their education. We want every dollar to count toward their success.
Calculating Your Ability to Contribute
The amount you can save each month and the time you have before your child finishes school will determine how much you can contribute toward this cost. For example, if you're able to save $300 per month for the next 4 years, the time your child start college, you’ll have $14,400 saved.
If you continue to save at the same rate, you’ll save an additional $3,600 per year. That’s a total of $28,800 ($300 x 12 mo x 8 yrs = $28,800) that you can provide towards education expenses. If the tuition is higher, the difference can come from scholarships, grants, and your child working a job.
2. Project the cost of education
The next step is to project what higher education will cost. Whether you’re looking at a 4-year university or a trade school, a quick internet search can provide you with the cost of tuition for schools in your area. In-state schools are going to be less expensive than out of state, and there's a good chance your child will find a good in-state school to pursue their major.
Once you have the yearly cost of tuition, add 2 to 4 percent for inflation for every year, including the year your child graduates. This will give you a more accurate total figure. Here’s an example for an in-state 4-year public university.
3. Decide on how to best save for college
Education investment plans do not have a guaranteed rate of return but have historically produced an average of 7% return. If your child is 10 years or more away from starting college, this type of plan can be very beneficial. The compounded interest can have a significant impact on how much you’ll have to contribute toward college.
Take a look at the charts below, how just $300 a month invested for 10 years with a starting balance of just $1,000, can net over $53,000 in savings.
Investing can provide tremendous leverage to cover education expenses. However, the closer your child is to starting college the less risk you can afford to take. A major downturn in the economy can significantly reduce your fund, leaving you short.
Options for college savings with less than 5 years to invest
- CD’s (Certificate of Deposit) saving account - Low risk with a 2 to 3 percent yearly return.
- Online saving or money market accounts - Low risk and low return, usually 1.5 to 2 percent, but better than the average traditional banks.
Options for college savings with more than 5 years to invest
State Sponsored 529 Plan - Higher risk, higher return. Savings grow tax-differed and tax-free when used for qualified college expenses. Plus, more than half the states give you a state-tax deduction or other benefits for your contributions. Do your research to find a good fund, because they are not created equal. Watch for high fees and commissions, and always check for funds in your home state first, because they are likely to offer the best tax breaks for in-state residents.
There are other options, such as UGMA/UTMA and ESA accounts, but they are inferior to a 529 plan. You can see a side by side comparison of these plans here.
Preparing for college expenses is similar to preparing for any major expenses in life. Time and consistency are the keys to successful savings. Start setting aside an amount each month toward higher education. If that seems difficult right now perhaps a written budget will help.
Check out the budgeting resources and the free budgeting course available on my site. Once you’ve freed up some money, you can take advantage of education saving plans that will help you leverage your contribution to cover more of the cost of higher education.