Four Key Questions for Back-to-[Saving-for]-School Season

By: Frances Cronlund, CIMA®, CExP™, CTFA, CFP®
5 Minute Read

The “back-to-school” sales and promotions have been in full swing this month as students across the nation return to their academic studies. As your students pack their backpacks full of school supplies and homework starts rolling in, parents cannot help but think about where all of this is heading. And it might cause your family to reassess your college savings plan.

Besides a home, college education may be your family’s biggest life purchase.

But what’s the best way to save for or pay for college?  To help you prepare, here are four key questions to consider:

 1) How much will college likely cost?

According to the College Board, the average annual budget for a four-year, in-state public college is $25,890, and the average annual budget for a four-year private college is $52,500.

Even though college costs are high, you might not need to or be able to save for the total amount before your student enrolls. Consider that you may plan to work during your children’s college years and feel you can afford to pay for some of the future cost from earnings. Besides, you may find it difficult to predict which type of college program or living arrangement is a “best fit” for your student—it can be difficult to plan for every possible scenario.

That said, you can plan based on potential options, such as the type of college program and living arrangement. Here are some examples:

Type of College Program:

  • Public two-year college
  • Private, for-profit colleges and certificate programs
  • Two-year college + transfer to four-year college
  • In-state, public four-year college
  • Out-of-state, public four-year college
  • Private, non-profit four-year college

Type of Living Arrangement:

  • At home or on campus
  • Off campus with roommates or relatives
  • Taking a gap year or semester

2) How much should you save in advance?

With so many variables to consider, it can be hard to decide what your funding target for college should really be. That’s why you may choose to save a portion of the projected costs—such as the average cost of “tuition and fees” only—and use this as a “down payment” on the college tab, similar to the down payment on a home.

The average of public and private school’s “tuition and fees” alone is just under $24,000 per year. But you might find that saving $96,000 for a potential four-year experience in today’s dollars before your child even enrolls to be a daunting task with many obstacles, including:

  • You’ll need to use discipline to put cash from your paycheck into a long-term college account.
  • You may find the rising cost of tuition hard to predict and different by school and region.
  • You may find investment returns unpredictable.
  • You’ll need to rebalance the risk in your investment portfolio periodically.

If you do plan to save only enough to cover the average cost of tuition and fees, then what about all the other related expenses, such as room, board, books, supplies, and transportation? You may choose to “pay as you go” and “wait and see” what the actual cost ends up being for those types of expenses. There are pros and cons to this strategy.

That may feel too unplanned for some. While for others, it might be just the right amount of planning.

The following table is an example of how a college savings plan can work to help you save for the average cost between a public and private four-year college’s tuition and fees only.  While this does not cover 100% of the total college experience, it does at least help save enough in advance to bring peace of mind and a big head start by the time your student is 18 years old.

When a student is in college, the monthly earnings that you had been saving toward future college can then be redirected to paying for college. This includes room and board, books and supplies, and other expenses.

Click the above visual for a closer look at our sample college savings plan.

3) What are some ways to save?

Now that you have a few examples of how much college may cost and different ways to plan, the next step is for you to consider in what type of account to save. You may feel better about your investment accounts if they are segmented by purpose.

You may have a rainy-day fund, retirement fund, vacation fund, and a college fund. All of those accounts are for different purposes, funded differently, and invested differently. When you divide your savings and investment choices by purpose, it helps manage investment risk.

Investment Risk is best managed if you match timelines for investment outcomes with timelines for investment goals. Also, you will mentally feel reassurance when you commit funds to future goals.

For education planning, it is hard to predict what your student’s future cost will be. Therefore, you might be tempted to commingle funds that represent multiple goals. For example, you might save for college in a Roth IRA but also plan that those funds could be used for retirement too—or vice versa.  You might save in a 529 Savings Plan for college, but also plan that any leftover funds can be used for other students or leave a legacy future generations.

It’s OK for you to save for college in a separate account or commingle with other goals in one account; just make sure you and your spouse or co-parent are on the same page about the purpose of each account. Working with a comprehensive financial planner can help you prioritize your goals, set-up the right account for the right goals, and manage to the proper investment risk level.

Examples of dedicated purpose, college savings accounts:

  • Education IRA (Coverdell Savings)
  • 529 College Savings and Pre-paid Tuition Programs
  • UTMA/UGMAs
  • Health and Education Exclusion Trusts (HEET)

Examples of multipurpose accounts:

  • Taxable investment accounts
  • Life insurance (accumulated cash value)
  • Roth and Traditional IRAs (limitations apply)
  • Other retirement plans such as 401(k) Savings (limitations apply)

4) What if there’s a savings gap? How do you pay for college and make up the gap?

Year after year, thousands of students do graduate from college. But very few families will have funds saved up in a dedicated savings account to pay the necessary expenses for a full college experience starting on the first day of classes to the last. Besides a fully funded college savings accounts, here are some ways you can bridge the gap between costs and savings:

  • Current income from you and your student
  • Early graduation by earning college credit in high school or summer sessions
  • Student can live at home or with relatives
  • Academic, athletic, musical and artistic-based scholarships from colleges and non-profits
  • Federal and college-based financial aid (Federal Parent PLUS Loan, student loans, grants)
  • Direct tuition gifts (e.g., grandparents), which are income and gift tax free to the student
  • Defer enrollment for a year or as needed to set aside savings

Please note, when need-based aid is guided by FAFSA (Free Application for Federal Student Aid), not all assets are included in calculating your family’s expected family contribution (“EFC”). Your retirement plans, life insurance cash value, annuities, and personal possessions do not necessarily disqualify you from financial aid. For example, the FAFSA currently excludes primary home equity from the EFC, but not all private colleges do. Even still, you and your spouse’s (even if a step parent) household income can disqualify your student from financial aid.

Before setting up any savings or investment program, it’s important to see how your entire financial picture is impacted by multiple options.

There are pros and cons to every strategy and type of account. And there are many competing goals for your cash flow and investments. Working with a comprehensive financial planner will help you prioritize goals and set realistic expectations on many financial fronts.

The earlier you can plan ahead, calculate the future costs, and know your funding options, the more financially confident you will feel as your student makes progress this academic year.

For more guidance or information on this topic, please reach out to the Curi Capital team at 984-202-2800.

Frances Cronlund, CIMA®, CExP™, CTFA, CFP®

Frances Cronlund is Curi Capital’s Senior Director of Wealth Planning, based in Raleigh, NC.

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