Perspective Matters
Two questions I get asked often are “how much should we save for our child's college?” and “when should we start?” Like most questions the first answer is it depends.
First, answer this question honestly - how strongly do you feel about paying for your child’s college yourselves? It’s OK to have different opinions on this.
Maybe you paid for your own college through grants loans and working part time. Maybe you went to Community College first and then transferred to a larger more expensive school once you had tried a few classes and knew what you wanted your major to be. You believe your kids will value their degree more if they make some sacrifices to get it. Or maybe your parents made sure you got a degree and graduated without debt, and you want to do the same for your kids.
You face a vastly different financial hurdle than your parents’ generation.
According to the Education Data initiative (June 2023, educationdata.org) the average cost of college in the United States is $36,436 per student per year, including books, supplies, and daily living expenses. The average in-state student spends more than $26,000 while the average private, nonprofit university student spends more than $55,000 per academic year, living on campus. Over the last 25 years, college costs have gone up more than 7 times faster than the general rate of inflation.
First, decide how much you want to focus on your own financial independence versus funding your children’s college fund.
Assuming you don’t have unlimited financial resources, the question becomes how you want to allocate the resources you do have to your different goals. Generally, I advise people to prioritize their own financial security ahead of their children’s education; you don’t want to risk impoverishing yourself later in life to fund your children’s education. They are going to see the benefit of that education more than you will.
In some cultures, parents believe in educating their children and in exchange the children care of their parents as they age. My advice is based on financial considerations and not meant to diminish anyone’s cultural norms.
Financially, I suggest you prioritize your goals similarly to the advice that we're all given when we fly; when you are with someone who requires your assistance, make sure you put your own mask on first before trying to help them. By ensuring your own financial security first, you increase your ability to provide sustainable support to your children.
Once you have determined how much you can comfortably towards college, you have several choices.
They vary in terms of control you retain and tax benefits. 529 accounts and UTMA accounts are the first two most people consider. Putting money into an UTMA account creates a completed gift, meaning it is your child’s money, no strings attached. As a result, anything earned in that account is taxed at your child’s tax rate, which will usually be lower than yours. In exchange for that lower tax rate, when your child is 18 or 21, he/she/they can take that money and do whatever they want with it. We call that the “Harvard vs. Harley” decision.
Funding a 529 account allows you to retain more control, and if withdrawals are Qualified (paying for “approved” education expenses, which include some vocational programs) anything earned in the account is tax free. If you don’t use all the money in the 529 for one child, you may change beneficiaries or under “SECURE 2.0” your child may be available to convert some of the remaining money on the 529 account into a Roth IRA for themselves.
Another option to consider – if you are eligible to contribute to a Roth IRA, you could consider your contributions as a source of funds to pay for your children’s college. You retain the most control with this option, but also must be careful to only withdraw what you’ve contributed and consider the impact on your own financial security.
There are more considerations when deciding which vehicle to use and how much to allocate towards your children’s college funds. Talk to a CERTIFIED FINANCIAL PLANNER™ and explore the most appropriate choices for you and your family.