How to Plan for Children’s College Education

We all know that there is a big difference in the cost of education depending on where you send your children to college. Much of the decision on where to go, and therefore the expense, is dependent upon a realistic matching of your child/children to interests, capacity, and innate capability.

Also, there is the very real possibility your child is not wired to either enjoy or benefit from a 4-year college degree. Matching applicable education with the appropriate expense only makes sense. Our culture and sometimes our pride get in the way of making good decisions.

There are new apprenticeship programs popping up, particularly in high-tech manufacturing areas. In another career direction, great education leading to a teaching degree can be found across the spectrum of colleges with the associated range of tuition. Regardless of the cost, the same time-and-money crunch applies to college savings that applies to retirement savings.

Also, the amount of student loan debt in our country is appalling. We need to be better stewards of our resources in this arena. So often we let a false pride get in our way when we say we want “only the best for our kids.” Perhaps we need examine what is best from a stewardship of time, money, and outcome. 

Start Early

Compare the difference between starting a college fund when your child is a toddler versus waiting until he or she is 13.

Starting earlier, you would have to save $345 a month to cover 75% of the cost of a public college education, according to Savingforcollege.com. Because you waited—you delayed saving for five years—you’ll have to save $646 a month. That’s almost twice as much!

Rather than regret the past, recalibrate the present. If you are on track for retirement but short of the needed education savings amount, you can always redirect 1% or 2% of your gross income from one pot, retirement, to the other for a few years. Recognize that this can result in you working a year or two longer before retirement or boost the savings for retirement after you’re done paying the college bills.

Loans

Or consider borrowing—judiciously of course. Parent PLUS loans, sponsored by the federal government, carry a fixed 7.9% rate. PLUS loans let you borrow up to the cost of tuition minus any financial aid. However, remember that borrowing on behalf of your student can jeopardize your own financial security in retirement. If the gap is a chasm, not a crevice, find a less expensive school.

Another way to get cash for college is to borrow against the equity in your home. With a home-equity loan, you pay a fixed rate (recent average: 6.4%). If you decide to go that route, borrow the entire amount upfront if the interest rate is low and fixed. With a line of credit, you pay a variable rate (recent average: 5.1%) and then borrow as needed. With both, you can generally deduct the interest on amounts borrowed up to $100,000, no matter how you use the money.

Determine the Amount You Are Willing to Spend

Other smart alternatives include making a fixed amount of money available to your child (children) for college. For example, an amount that will cover four years at a local college or only one year at an out of state school. For most, a college degree is what is important not the school’s name written on the diploma. 

Talk honestly with your kids. Let your kids know what you are prepared to contribute for college expenses before they make up a college wish list. Be clear that if the net price after financial aid doesn’t end up at your number, it has to go off the list. Without this conversation, you’ll be hard-pressed to say “no” when the acceptance letter from an expensive university comes. Make sure only clear, straight, truth is in play when it comes to making these hard choices about “higher” education for your children. It is hard, but necessary, to isolate the issues when there are multiple personalities and emotions in the decision-making room.

Discuss Options With Family Members

Often grandparents are financially able and want to contribute to the costs of college. Speak frankly with them a year or so before college selection process starts. Transparency and clear communication will yield the best for you, them and  the grandchild.