Looking for ways to navigate college financial planning and empower your child's future? Read on to learn how to financially plan for college
Moving off to college is a major step in any young adult’s life. For most students, this is the first time they’ll experience a true sense of independence –– and transitioning to on-campus life will mean learning how to maneuver around a hot plate, when to separate light and dark-colored clothes come laundry day, and how to live with strangers with seemingly polar opposite interests. This new phase of life will also require a great deal of planning, from SAT prep, to move-in day, to the first day of classes, and beyond.
But parents, too, will have to do their share of college planning to ensure this transition is a smooth one, beginning long before the bittersweet goodbyes on drop-off day. College financial planning can be vital to both your child’s success and your financial wellness, allowing you to support your student’s future without harming your own. And as you’ll soon see, the benefits parents and their children stand to reap from proper student financial planning are far beyond just monetary.
For parents looking for ways to navigate college financial planning and empower their student’s future, read on.
50 years ago, the average year of college at a state school hovered around $4001 –– a price tag that might more accurately be found on a college textbook today. And while students in 1973 could work part-time jobs to pay their way through college, the combination of outsized education costs and increased rates of inflation means that more than half of all American students take out student loans to cover expenses.2 But through careful and proactive college financial planning, parents can reduce the debt their student takes on or eliminate the need for any type of student loan or financial aid altogether.
The college financial planning process is like many of the other financial planning methods we’ve discussed, like retirement planning, investment planning, and personal financial planning, in that it focuses on taking gradual strides to chip at a larger goal over time. Whereas a $30,000 check (the amount of debt that the average student loan borrower is left with after earning their diploma) can be hard for many parents to write, college financial planning employs strategic steps to make this figure much more manageable.
American college admissions are more competitive than ever before, and while scholarships may be available to your high-achieving student, they’re far from guaranteed. Further, parents who earn too much to qualify for pell grants and other financial aid programs may be left with three options: foot the bill and sacrifice the future they have worked for, let their student go deep into debt, or discourage their child from pursuing their dreams.
College financial planning allows parents to be prepared for these challenging circumstances, meaning they won’t have to put their or their child’s dreams on hold.
Whether your student is just years away from their first day of school or you’ve got a decade to get ready, here are a few small steps you can take which will make a big difference in your college financial plan.
If the last time parents researched college costs was when they were undergraduates, seeing what their twenty-first-century student may be in for can be a rude awakening. Before beginning to squirrel away money or pursue other more systematic college financial planning strategies, be sure you have an idea of how sizable the college fund will need to be –– taking books, housing, meal plans, and even parking fees into consideration. Whether your child has eyes on a state school or Stanford, managing your expectations can prevent a major gut check down the road.
If you’re ready to begin funding your student’s education, you can take the “piggy bank” approach –– allocating extra funds each week, month, or quarter toward the fund –– or you can opt for a more strategic method. Through a 529 plan, parents can contribute income directly into a tuition savings account which they can then withdraw tax-free to finance tuition, room-and-board, and other education-related fees.3 Other tax benefits, like deductible contributions, vary state-to-state, but can help to lighten the load even further.
Though 529 plans have usurped prepaid college plans in popularity, parents in states with these plans in place still swear by their convenience and effectiveness. And whereas 529 plans allow parents to save toward future purchases, prepaid college programs let parents literally pay for their child’s education in advance. Here’s how it works: Parents enroll in a prepaid college program, and can finance their child’s education credit-by-credit, semester-by-semester, or whatever works best for them.
Perhaps the biggest benefit of this strategy is that parents can pay for college at the current rate, rather than waiting for tuition costs to increase further. With that said, these programs often limit students to state schools, and the list of states sponsoring prepaid college programs4 has dwindled to just nine.
Finally, one of the best ways to financially prepare to send your student off to college and out into the world is by being as proactive as possible. A contribution of $100/month towards a tuition savings account won’t make much of an impact if you wait until their senior year to start saving, but that same contribution over the span of a decade can reduce their college costs by a third. And by pairing proactive thinking with any (or several) of the above strategies, you can guarantee that your child’s goals, dreams, and future are funded.
For more financial planning tips, like financial planning for retirement or financial planning for couples, and to learn how to properly set long-term and short-term financial goals, visit our resource library.
Sources:
1. Education Data Initiative. Average Cost of College by Year. https://educationdata.org/average-cost-of-college-by-year
2. Forbes. 2023 Average Student Loan Debt Statistics. https://www.forbes.com/advisor/student-loans/average-student-loan-statistics/
3. U.S. News. What is a 529 Plan? https://money.usnews.com/529s
4. Investopedia. The Last States With Prepaid Tuition Plans. https://www.investopedia.com/financial-edge/0311/the-last-states-with-prepaid-tuition-plans.aspx
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