How much you should fund toward your child’s future education is a question that isn’t the easiest to answer, but there is a way to figure out what works best for you and your family.
It is no secret that the cost of college education is increasing faster than inflation or stock market performance. Over a 30-year period, college tuition (not including the total cost of education) has risen nearly 400% according to the National Center for Education! Understandably, this can leave many parents overwhelmed at how to successfully plan for this huge future expense.
After you have a child, one of the best things I can recommend is that you open a 529 plan to start saving for your child’s future education cost. Among the myriad accounts that are available to do college tuition savings, including UGMAs, UTMAs, and the like, 529s are the hands down winner. The top benefit of using a 529 plan for college savings is that your investment grows tax-free. The second benefit is that withdrawals aren’t taxable as long as they are used to pay qualified higher education expenses. Third, the owner of the account remains the owner of the account until they die – there is no other time limit to the account, and the funds aren’t passed to the beneficiary at a specific age. Some states also may offer tax deductions or tax credits in the year you put money into your 529.
But how do parents figure out how much money they should contribute to a 529 plan a month? Many people just pick a random number like $50 or $100 a month and hope that will be sufficient.
Instead, here is a quick, yet effective, process to determine how much money to fund toward your child’s future education.
Project Future Education Cost
First, you’ll want to understand what your child’s projected future education costs are. This doesn’t mean you have to fund the entire amount, but it’s helpful to know what college costs will look like when your little one is ready for post-secondary education.
You can access online college tuition calculators to help you estimate what your child’s future educations costs will be however many years from now. For example, if your child is 1 today, in-state public tuition is projected to cost a whopping $158,152 in 2035. Private college tuition is estimated to cost $294,807.
Set a Goal
Next, you’ll want to set a goal so you can work toward a real number. For some parents, they decide they want to cover tuition and materials and have their child pay for any experiential and living costs like rent and entertainment. Other parents decide they would like to be able to cover all of it but limit their child to in-state public schools where the tuition is significantly less than private schools. And other parents may push their children to work toward scholarships and grants to help cover the cost of their education.
There is no right or wrong answer. This is a decision and a goal completely personal to you and your family. But whatever it is, setting a goal will help you take the necessary steps to reach it.
Determine Your Monthly Contribution
Determining your monthly contribution toward your child’s future education costs is often the most elusive step in the process. As with any financial goal, it shouldn’t be made in isolation of your overall financial situation and long-term goals.
While the first two steps in the process help make it clear what education costs are likely to be and how much you would like to be able to fund toward that total cost, the third step in the process is incorporating education planning into your overall financial plan to ensure that you do not undermine other important financial goals like retirement. Remember, there are no loans or scholarships for retirement. So, if you underfund for your own future, there is no recourse.
Therefore, revisit your cash flow. Make sure you are maxing out your retirement first, then account for all your fixed and known expenses like the mortgage, utilities, insurance, taxes. Finally, take a hard look at your variable costs like meals, entertainment, and shopping. You have two options: 1.) Whatever money is left over can be earmarked for funding a 529 Plan, or 2.) You can make lifestyle adjustments if necessary so that you can fund more money toward the education goal.
Set Expectations and Provide Guidance
As a parent, you may be tempted to borrow against your future to provide for your child’s education costs. Don’t. The last thing you want to become is a financial burden on your children later in life. Therefore, do what you can and plan for a number that works for your family. Then, set clear expectations with your child so that they don’t operate under false assumptions.
There is so much value you bring well beyond the funding of tuition. You can help prevent your 17-year-old from getting saddled with too much student debt through, yes, the savings in a 529 plan, but by also helping them make a sound financial decision when it comes to navigating their education journey.
- Helping your child understand the ROI of their education so they don’t assume more debt than their first year’s projected income
- Finding and applying for scholarships and grants
- Understanding the value of hard work and the worth of a dollar
- Comparing the costs of multiple institutions and ways to achieve the greatest value
- Earning college credits while still in high school and starting internships early
- Considering community colleges for prerequisites and then transferring to a 4-year accredited college for a Bachelor’s Degree
There is no right or wrong answer to the “how much SHOULD you fund” question. The answer is some intersection of your values, your history, and your ability to pay.
Some parents, unfortunately, cannot pay anything. If that is the case, your child simply must find academic or athletic scholarships or grants and that may dictate where he or she goes to school. Some parents want the college years to also be financial learning years for their kids. If this is your wish, you can choose to pay for all or part of tuition, but expect your young adult to work to cover the remaining expenses. Yet, other parents had college completely covered by their parents and want to extend that legacy. For the rest, it was just the opposite… if your parents covered nothing, and you suffered because of it, maybe you want to make up for the perceived sins of the past.
Whatever your core values are about paying for education, you still should not write a check bigger than you can afford. So, the answer is to marry your desire to pay with your ability to pay. Sometimes coming up with a number is the hardest part of the process.
Education planning is part of financial planning. The earlier you start, the more likely it is that you can reach your financial goals. If you have questions about education planning or would like more guidance on how to incorporate it with your overall financial plan, selecting the right 529 plan, or how to reach your financial goals, don’t hesitate to reach out to us or your financial advisor.