Preparing for a child’s higher education can be a daunting task, and it is never too early to begin thinking about it. However, before financially preparing for a child’s higher learning, you should consider your own financial security in retirement. While this is contrary to what most loving parents want to do, ask any teen if they’d rather support their parents in old age or pay for their own college, and you’ll always get the same answer. Another major factor in evaluating the prioritization of these two objectives is to remember that tax-deferred money which was set aside for college cannot be used for your retirement without penalty. However, tax-deferred money which was set aside for retirement may sometimes be useable for children’s college without penalty. But, if you and your financial advisor have decided that funding your children’s higher education is a priority, how should you plan?
1. Prepare for the Worst – While regular inflation averages around 4.5%, college tuition costs have been rising much more quickly. Many schools consistently experience double-digit annual inflation in overall costs. This means the $12,000 annual cost of your toddler’s school of choice could be $100,000 a year or more by the time she is ready to attend. Research potential institutions early and often to evaluate how their costs are inflating. Don’t forget to consider various costs in addition to tuition, such as fees, room, board, matriculation, books, etc.
2. Hope for the Best – Your child may be eligible for various types of aid such as scholarships or grants. Consider your child’s talents in sports, music, art, etc., and look for schools that provide scholarships for such talents. Various institutions honor different talents through scholarships. Many scholarship contests exist as well, from writing contests to beauty pageants. If you don’t have the money, spend the time and research the sources of available aid. One word regarding Pell Grants, don’t let your child earn too much at a summer or school-time job. I’ve known several students who worked that extra job only to learn that they lost their Pell Grant.
3. Look to the Community – College that is. Community Colleges may not have the highest academic standing, but they are often less expensive. For getting the basics it can be a real cost savings, and employers never ask where you had Freshman English. However, make sure that credits will transfer to your child’s school of choice for additional study.
4. Loans – Though I would suggest avoiding loans for education, it is an option. If you consider them, don’t forget that educational loans have stringent repayment requirements. Most are not dischargeable even in bankruptcy.
5. Work – Your child could always work to pay for school or part of school. In addition, some employers have tuition reimbursement programs although most require full-time employment. It is possible to work full-time, take a full schedule, and still make good grades. I know because I’ve done it.
6. In the Money – If you plan to fund a child’s tuition from savings or investments, there are numerous considerations that should be evaluated by a competent, unbiased professional. These include risk tolerances, timeframe available until the funds are needed, and more. Remember, you’ll need to choose a vehicle and a shelter. The vehicle is like your automobile. It gets your investment from one place to another. It could be stocks, bonds, mutual funds, certificates of deposit, savings accounts, or anything that helps the money to grow. The shelter is like your automobile’s garage or carport that protects it from the weather. An investment shelter protects your investment from taxes, or you may choose to leave your plan exposed (taxable). You can do that by just putting the money away yourself, or have it taxed at the child’s rate through a Uniform Gift to Minor’s Act (UGMA). Deferring taxation by using shelters such as the Coverdell Educational Savings Account or a 529 Plan may allow the money to compound more effectively. As always, before making a decision consult your financial professional.
Adrian Eddleman is founder of the local wealth direction and coaching firm, Eddleman & Eddleman, LLC. He has both an MBA and BBA with extensive formal studies in finance and economics. He can be reached at Adrian@Eddleman.biz. Because individual situations vary, Eddleman & Eddleman, LLC, its representatives, and affiliates will not be held responsible for individual financial decisions made based on information from this article without our personal consultation, review, and recommendation concerning your situation.