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Saving for College Education Guide

Saving for College Education Guide

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For parents who are saving for their child’s college education, the main concern is not being able to save enough. The first step is to decide if you’re in the position to help your child. This may sound harsh, but your finances take precedence over your child’s college savings. Goals like paying down your debt, saving for retirement, and maybe even saving for a home purchase come first. Remember that your child has many options while you do not.

How Much Will College Cost in 18 Years (or less…)

The first step is to figure out how much college will cost in the first place. After that, it is a matter of how much you’re expected to contribute to your child’s education, and finally, how you’re going to go about saving that much money.

Most kids go to college when they turn 18 — so 18 years is when most parents think about this. If you have less than 18 years to go, that’s fine too. You can change the number of years in the calculation.

According to this College Cost Projector at Vanguard.

  • 4 years of in-state Public school costs $85,480 today and about $221,667 in 18 years
  • 4 years of out-of-state Public school costs $149,720 today and about $366,256 in 18 years
  • 4 years of average priced Private school costs $194,040 today and about $503,185 in 18 years
  • 4 years of expensive Private school costs $240,820 today and about $624,497 in 18 years

Vanguard College Cost Projector

Yikes!

To check my number, I found another calculator from FinAid. This site also offers some additional useful information that I summarized here:

  • College costs increase about twice the inflation rate; currently, increases have averaged 5% to 8%.
  • Total cost includes tuition, fees, room and board, books, travel, and incidental expenses.
  • According to the College Board’s Trend in College Pricing, the 2018-2019 average annual total costs were:
    • $12,320 for two-year public colleges
    • $21,370 for four-year public colleges and universities (in-state)
    • $37,430 for four-year public colleges and universities (out-of-state)
    • $48,510 for four-year private colleges and universities

The numbers are the same as the one offered by Vanguard above.

How to Pay LESS for College

Unless you’re independently wealthy, I believe that the entire process for choosing which college to go to and how to fund the education should be a business decision. Teach your child early on about the consequences of their choices and why choosing to go to a prestigious Ivy League school may not be the best life decision.

1. Choosing the Major

This is not something that you can decide in a vacuum without your child’s input; however, it should be part of your planning process. For now, let’s assume that your child will choose a marketable major that a good chance of paying for itself. Hopefully, your child doesn’t fall in love with a major that has limited career choices.

Keep this in mind, because it is something that you will nudge your child in the right direction as he or she grows up.

2. Choosing the School

The main criteria for selecting the right school should be which schools give you the best education and college-life experience in the desired field at the lowest cost. It should not be about location, brand name, sports teams (unless your child is getting a sports scholarship), and other less important factors.

In general, In-State Public and Community Colleges are the least expensive, and Out-of-State Private Colleges are the most costly. When your child is ready to go to college, you have to work together to figure out the Quality vs. Price that is acceptable to both.

Here is a power tip. You could also plan to have your child attend a less expensive school during the Freshmen and Sophmore Years, then transfer to a more prestigious school for the last two years. This will save a significant amount of money and allow your child to get that Ivy League degree.

3. Funding Sources

The good news is you do not have to pay for everything. There are funding sources available that could help you pay for college. Here are a few traditional funding sources:

  • Government grants and scholarships
  • School grants and scholarships
  • Work-Study Jobs
  • Student loans

Less common funding sources:

  • GI Bill – The GI Bill provides educational assistance to service members, veterans, and their dependents.
  • ROTC Scholarships – The ROTC programs financially assist college students in exchange for military service after graduation. The scholarship program is different for each branch of the military as follow:
  • Tuition Reimbursement Program – Many companies offer a tuition reimbursement program as part of the benefits package. If you can find the right company that will help you with your tuition, this could be an option to fund your college education while working.

Non-traditional funding sources:

  • Side hustles. Nothing should stop you or your child from trying to make money on the side.
  • Income-Share Agreements (ISA). Some investors are willing to pay for your child’s college education. In return, they are asking for a share of their future income. Here is an article about ISA at Business Insider.

As you can see, you don’t have to pay for all of the estimated costs above.

4. Paying Less for College

In addition to going to a less expensive school, there are additional options to help you spend less money for college:

  • Advanced Placement (AP) Courses and Exams – Your child can take some AP courses while in high school to satisfy some basic course requirements. If your child is capable and the high school offers AP courses, you could potentially shave off a semester or even two. AP courses are generally free, so you’ll be saving about half or a year’s worth of college expenses.
  • College Level Examination Program (CLEP) – Another way to get college credits at a fraction of the cost is to take CLEP Exams. The exams can help your child meet a lot of the basic and mandatory requirements (here is a list of the CLEP exams available from College Board).

These two options allow your child to save considerably on college expenses.

Another option is to take more credits per semester. When you’re a full-time college student, you’re charged a flat rate by the semester (vs. part-time students that pay per credit). The minimum credit requirement is typically 12 credits per semester, and you need 120 credits to graduate. This means most students average 15 credits per semester. However,

  • if you take 17-18 credits per semester, you can graduate one semester early.
  • if you take 20 credits per semester, you could potentially graduate one full year early.

The difficult part is scheduling the courses and be able to meet all the course prerequisites. Depending on your college’s course schedule, this may or may not be possible.

Child vs. Parents Contribution

Now that you know roughly how much college will cost and the various ways in which you can spend less for college education, it is time to figure out how are you splitting the costs.

Are you planning to pay for all of the shortfalls for 4 years of college? This is not the only option. Depending on what you’ve prepared for your child vs. what your child decided to do in the future, you could split the difference in a variety of ways.

I’ve put together a separate article that helps you address this question: Pay For College or Make Them Work for It?

Personally, I like the idea of saving just enough for a good 4-year public college education and have our son share the responsibility if he wants more. Here are four reasons why I want my son to pay for part of his college expenses:

  1. It is less burdensome on our lifestyle and effort to save for retirement. Also, we have to consider that we will most likely have to support our aging parents. We cannot let his college savings take priority over other more pressing goals. After all, he has student loans, scholarships, financial aids, and other options at his disposal. For example, he can choose to go to a less expensive school. We do not have the same kind of flexibility with elderly care and retirement expenses.
  2. It teaches him a life lesson about trade-offs. Specifically, he cannot have everything he wants, and if he really wants something, he will have to work for it. After all, 4-year Ivy League education is not a NEED; it is a WANT.
  3. It teaches him the value of money. We can show him the difference between a more expensive and less expensive school. Which one should he choose — go to a more expensive school and graduate with debt, or go to a less expensive one and possibly graduate with a positive net worth?
  4. Having our son share the responsibility of paying for his education may make him appreciate education more.

How about you? How much are you planning to save for your children’s education?

Saving for College Options

At this point, you should have a reasonably good idea of what you need to save for college. Again, it is crucial to prioritize your goals and remember that college savings come afters paying down your debt, retirement savings, and maybe even buying a house.

Let’s assume your target is $250,000, and you have 18 years to accomplish this goal. There are a few things we need to answer:

  • What is the Best College Savings Account?
  • How to Save Money for College Expenses?

Best Ways to Save Money for College Expenses

When saving for college expenses, three different options come to mind.

  1. 529 Plan
  2. Coverdell Education Savings Account
  3. Custodial Brokerage Account

Let’s go over the differences

1. 529 Plan

This is probably the best of the three options. There are two main types of 529 Plans: Prepaid Tuition Plans and College Savings Plans. Prepaid Tuition Plans let you purchase college credits at today’s price at a participating college. College Savings Plans let you invest money that can be used toward qualified education expenses. In my opinion, the College Savings Plan is far superior to the Prepaid Tuition Plan, and that’s what we will focus on here.

The second thing to realize is that each State has its own 529 Plan. You can choose to open a 529 Plan with any state, or even with multiple states. The key things to consider are:

  • Some plans offer tax benefits for its residents. For example, Virginia taxpayers may deduct up to $4,000 per account per year from their Virginia state individual income taxes.
  • But the more significant factor is the investment options and expenses. There is a big difference between the worst and the best 529 Plans. If your state’s plan belongs to the bottom quarter of 529 Plans, you might be better off giving up the tax benefits and choose one of the top plans.

Here are the key advantages and disadvantages:

  • Advantages – Very high contribution limits. Your contributions could offer tax benefits at the State level. Anyone can open and fund a 529 Plan for a beneficiary. You can name a new family member as the beneficiary at any time. You can invest your money with any 529 Plan. You can withdraw money tax-free for any qualified education expenses. You can also use the money for qualified education expenses before college.
  • Disadvantages – Investment options might be limited. Investment options could be expensive.

2. Coverdell Education Savings Account

You can open a Coverdell Education Savings Account with most brokerage firms, and you can invest in just about any investment you choose.

However, there is a contribution limit of $2,000 per year, which makes it hard to save enough money. There is also an income limit of $95,000 to $110,000 for a single filer or $190,000 to $220,000 for a married couple filing jointly. Lastly, the money must be used before the student turns 30 years old.

3. Custodial Brokerage Account

This is probably the least optimal option of the three.

A Custodial Brokerage Account is the same as a regular brokerage account that you invest on behalf of your child. The account becomes your child’s once he/she reaches the legal adult age.

  • Advantages – You can contribute any amount you want and have access to all investment options. You choose the brokerage firm and can fully control the expenses.
  • Disadvantages – The account becomes your child’s, and you cannot force your child to use it for education. The money count against your child for financial aids purposes. This is a taxable account with no tax advantage whatsoever.

Overall, your best option is a 529 College Savings Plan.

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plonkee
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plonkee

Ideally I would save enough to cover the EFC for 4 years and a bit more. Super ideally, they’d get a scholarship and we could split the money 50/50.

KMC
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KMC

My wife and I have the exact same strategy as your commenter.

We took a guess at what in-state tuition would be based on today’s rate and the current (8-10%) year-over-year increase and came up with a number. If our kids want to go to a school more expensive then that, they’re welcome to but I won’t be paying the difference – they will.

Steve
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This is one of the best ideas I’ve read in a long time. Guaranteeing your child a college education at a public university but telling them they are on their own for a private university education is exactly the right mix of responsibility by the parents and the child.

I have pretty strong opinions about this, because I’ve never planned to pay for my son’s education, other than whatever grandparents, etc. contribute. I paid for my own education and frankly I expect my son to pay for his own, too – but this is a good compromise.

Chief Family Officer
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I completely agree with you that college savings is not as big a priority as other areas – we are sacrificing college savings for retirement savings and in a couple of years, paying for private school (our local public school is terrible; I have plans to blog about this soon). We will definitely help our kids pay for college; but how much assistance they get depends on how much we can afford then, not just what they want. What I hope was implied in my previous comment is that simply that if you plan to save the full amount of… Read more »

KMC
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KMC

@Pinyo – We’re right in line with each other if you consider inflation. The College Board reports inflation-adjusted public college increases of about 4% for the last 20 years. I figure, if anything, states are going to reduce funding for higher ed.

This is one saving area one want to nail as close as possible. Here, it is possible to ‘save too much.’ With that in mind, we’re prepared to adjust a little bit either way if we’re not on track many years from now.

SavingDiva
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SavingDiva

I don’t have children yet. However, I would like to pay for my future child’s college tuition. My parents allowed me to graduate from undergrad with no loans or debts. I wish to do the same thing for my children. If I save too much (or they earn a scholarship), I would just give them the investment account to kick start their retirement fund….

Becca
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Becca

I grew up in a family that put a tremendous premium on education and so my parents saved pretty much all they could — more than the federal government expected of them, anyway. I think that was really important. If you don’t contribute what the feds think you should, then understand that your child either has a choice of delaying education until they are financially independent (usually legally defined as around age 25 — which cuts into *their* lifetime income significantly) or taking on high-interest private loans. To be honest, a lot of parents think that it is their money… Read more »

Jonathan
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Jonathan

I totally agree with your perspective on this one, it encourages ownership and the recognitiion of the value of money

Saving for College Education Guide

by Pinyo Bhulipongsanon time to read: 8 min
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