Saving and Investing for College Education

As parents of children all too rapidly approaching college age, we are all too painfully aware of the rapidly skyrocketing costs of a college education. To many middle and upper middle income families, the cost seems so high that planning may seem futile.

In truth, finding the cash for college isn’t really the greatest challenge. The challenge is paying for college without sacrificing our own goals for retirement and beyond. Many families who have not adequately prepared for college resort to cashing in retirement assets, taking on burdensome loans, or using up the home equity they need for retirement. Good planning, preferably initiated many years in advance of the need, can reduce the need to resort to such options.

Here are a few pointers to consider:

Start young. Give your savings time to grow. Those who begin saving for college when their child is less than 5 years old are much more likely to successfully meet their saving goals. To reach a savings goal of $100,000 by the child’s 18th birthday, assuming a hypothetical 7% after tax rate of return, the parents of a newborn would need to put away $232 per month. However, the parents of a 10 year old would have to put away $780 per month to reach the same goal.

Have the child help. Studies seem to indicate that students who are paying a sizable portion of their own college education are more highly motivated and generally do better in school than those who are getting a totally free ride from their parents. Parents should consider setting their savings goal with the assumption that students will pay up to a certain amount through part time jobs and/or student loans. This helps make the savings goal more achievable.

Involve the child in the planning process. OK, I don't mean your toddler, or even your 6 year old. However, as the child enters high school, it is important you involve him or her deeply in the financial planning for his/her own education. If you are working with a planner, the child should attend the meetings. In fact, this is a good reason to hire a planner all by itself! Using a planner takes the burden of saying NO off your shoulders! Being involved in the planning process will help your child understand the enormous expense involved. Numbers such as $30,000 per year mean nothing to a 16 year old unless they are put in context of an overall plan. They should understand such issues as the serious implications of mom and dad borrowing against their retirement plan, or cashing out the equity in their home. The result will hopefully be a child who is much more careful regarding their college expenses - and perhaps even a little more appreciative of your sacrifice.

Don’t ignore your own needs. Parents are willing to sacrifice everything for their children. However, it is foolish to ignore your own needs. Parents in their 40’s and 50’s need to be actively planning for their own retirement. This is not a good time to be using up all your home equity, or taking loans against retirement accounts. Parents need to remember that retirement may be only 10 – 15 years away. When considering the widespread use of forced early retirement and downsizings in corporate America, your retirement date may come sooner than you think, and may not be under your control.

Shop price. Your child’s college education is a product category in which numerous institutions are competing for your dollars. Make your decision accordingly. Price should be an important consideration. Many parents leave college selection decisions solely to their 17 year old children. Many of these kids are more likely motivated by where their boy/girlfriend is going than by such unimportant matters as the yearly tuition. Certainly certain superior schools command a high price tag based on a distinguished reputation in a certain academic field – but it is your responsibility as parents to consider whether the high price of the school your child wants to attend is thus justified. It is your money. You are not a bad parent for questioning or overriding a child’s decision. Despite their objections to the contrary, you are not ruining their life by not agreeing to fork over $35000 per year so they can attend the University of Hawaii.

Take advantage of tax favored strategies. Money that grows tax free accumulates far faster than the same sum in a taxable investment account. A professional financial planner such as Frontier can help you weigh the relative benefits of the many tax favored college saving strategies, including the well known 529 and Coverdell plans and less well known gifting and trust account strategies.

Obtain professional assistance. A professional financial planner such as Frontier can help you balance your college and retirement goals and develop the best strategy for achieving both. Choose a planner who is not held captive to selling proprietary products such as insurance or annuities. (while appropriate for some investors, insurance based products are not always the ideal choice for a college savings program). As with all aspects of financial planning, choose a planner with a strong commitment to ethical standards. The law actually does little to protect clients from unethical behavior. Only a strong ethical commitment on the part of the planner himself ensures that you will get the best possible advice.


Call or email Frontier today for a free college planning / retirement planning consultation. Frontier is conveniently located in Somerville NJ, in beautiful Somerset County. We provide client centered financial advice and investment products to residents of nearby communities of Hillsborough, Bridgewater, Basking Ridge, Manville, Branchburg, Warren, Martinsville and Franklin Township, as well as nearby Hunterdon County communities.

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