One of the biggest expenses that can face parents is the cost of education. Education is also one investment that has the potential to pay off in spades. I couldn’t do the job I do without the degrees I have, so I know personally how much having an education can make a difference in someone’s life.
That said, college costs are escalating. At a state university known to be a bargain, I paid about $1,000 in resident tuition and fees for a full-time semester as a graduate student over a decade ago; today, that same semester costs over four times as much! At that kind of rate, we will be looking at astronomical pricing even for residents at a public university in a couple of decades.
If you are the parent of a young child, expecting a new one, or just planning for one, you may want to get informed and get working on your financial plan for their education soon–if not immediately. Like any investment (which we will look at shortly), time is a huge factor–if you start early, time is your friend and if you start late, time is your foe.
Consider college savings like any other investment
Like any other investment, college savings is affected by your time horizon, your risk tolerance, taxes, fees, and inflation. Start today if you haven’t already! Every day you wait is one less day you have for the magic of compounding returns to work for you. Eighteen years is a fantastic time horizon to work with for investment, but if you wait until your child hits kindergarten, you’ve lost almost a third of that time. Consider what you can deal with in terms of risk, which may be related to your time horizon–I’d be more than comfortable with 80% of the money I’m saving for a college education being in the stock market when I have fifteen years to go, but a lot less comfortable with that if I’ve got three years left.
Take advantage of whatever tax advantages you can get
The two primary investment vehicles with tax advantages for education are the Coverdell Education Savings Account and the 529. Both offer tax advantages; the 529 is meant for higher education only and allow much higher contribution limits than the Coverdell, but the Coverdell allows more flexibility in investment choices and can also pay for expenses for qualified elementary and secondary schools. Don’t be confused by the state run 529s–you don’t need to invest in your own state’s plan, although there may be some advantages if you do so (this is not the case in Hawai’i). Investigate both options.
Do not prioritize education over retirement savings!
No matter how much you love your children and how much you want them to do well academically, do not prioritize their educational savings over your retirement savings. In a worst case scenario, your child can borrow money for their college education–you cannot borrow money to fund your retirement! Yes, both are worthy causes and both deserve your financial attention, but don’t put the education above the retirement. It can leave you in a horrible spot when you would like to retire even if it helps your child.
Consider public institutions and junior/community colleges
Public colleges and universities are generally not as prestigious as private ones, and junior or community colleges are even less so, but honestly, the price difference may not be worthwhile. The difference in the milieu between a big university and a smaller community college could also work in the favor of your child. It’s a much smaller jump for high school students who are used to being in smaller classes and checked on regularly by their instructors. I know for myself I was in trouble at the university as soon as I was in a lecture section of three hundred students and heard the lecturer say that they don’t take attendance!
There is an important caveat, however: your local college or university may not offer a program that your child is interested in. In that case, this may not be as useful a tip.
Look far and wide for financial aid and consider prepayment plans
Don’t look a gift horse in the mouth. Fill out the FAFSA form, check if your place of worship, employer, or union offers scholarships or educational funds, investigate if any of your child’s unique talents or activities in high school and earlier offer any kind of assistance, and scour the countryside for any other kinds of scholarships. There’s nothing to lose but time and paper, so search for any kind of aid they’re eligible for.
Some schools offer “prepayment” plans–pay for your child’s tuition now, at today’s rates, and when it’s time, your child’s tuition has already been taken care of. There are some huge risks with this plan, primarily in that your child would have to actually qualify for and attend that particular school. What if your child ends up not being college material or wants to attend another college, or that college doesn’t offer the programs your child is interested in? Consider these with a grain of salt.
You have many things to consider in saving for a child’s college education. Think about it as if it’s a long term investment–which it is. Start early, use whatever tax advantages you can, consider lower cost in-state options, and search, search, search for any funds, scholarships, or grants your child may qualify for, but don’t save for your child’s education at the expense of your own retirement. Good luck with this financial goal!
As a side note, one of my life goals is to set up a scholarship fund for Buddhists who live in Hawai’i who intend to study social work with children and families, so maybe someday I’ll be able to help aspiring social workers with their educational costs. I don’t anticipate it’ll be a huge scholarship, but I know from experience that every penny counts!
