January 9, 2019

Don’t let the high cost of a college education prevent you from developing an effective strategy to deal with those costs. Before you can determine how much to save for your kids’ college educations, there are several decisions to make:

Does each child require the same level of support? While parents typically want to treat children equally, each child’s needs may differ. One child may excel in school and want to attend an expensive private college, while another child may feel more comfortable at a local public university. Thus, consider the best options for each child, realizing the price tag may differ by child.

What is your savings goal? Setting a savings target can be difficult if your child is many years from college. With college costs increasing so significantly in recent years, assuming similar increases in the future can make your savings goal seem overwhelming. To keep your savings amount reasonable, you can estimate your savings target based on today’s college costs, increasing that amount every year to cover actual college cost increases. Also decide whether you are aiming for a public or private college, which have vastly different price tags. If you’re not sure, start with private college costs. It’s easier to reduce savings than to increase them.

Will your child contribute toward college costs? Most children would have difficulty paying all college costs, but you may expect your children to help fund a certain percentage of those costs. For instance, you may make them responsible for room and board, tuition, books, or personal expenses. Tuition and fees represent approximately 74% of total costs at private colleges and more than 48% at public colleges (Trends in College Pricing, 2018-19).

Will your family qualify for financial aid? Even if your child is several years from college, it is worthwhile to evaluate whether you would be eligible for financial aid. Don’t just assume a high income will preclude you from aid. Also, be aware that many scholarships are awarded based on merit, not need.

Will you need loans to pay some college costs? By starting a savings program early, hopefully you won’t have to borrow for college. Borrowing can put a significant strain on your finances, usually at a time when you should be concentrating on saving for retirement. However, there are a variety of loan options available, with some of the most advantageous loans available only to students. Even if you don’t want to burden your child with these loans, it may make sense for your child to obtain the loan. You can then give the funds to him/her at a later date to repay the loan.

How much can you save on an annual basis for college? You don’t have to select a fixed amount to contribute annually. You may decide to increase savings in the early years or contribute an amount that increases every year.

How will you save for college? There are a number of ways to save for college and to reduce your after-tax costs. Look into Section 529 plans,* Coverdell education savings accounts, education tax credits and deductions, saving in your child’s name, and using IRA funds for college costs. Evaluate all options in light of your financial situation.

After making these decisions, you may find your college savings amount is not as daunting as you thought it would be. The important thing is to start your college funding program now.

* Beginning in 2018 you can also use a 529 plan to pay not just for college costs, but also for public, private, religious elementary or secondary schools, thanks to the Tax Cuts and Jobs Act.

© 2019