Yahoo Finance Planning to help pay for your kids' college costs? Experts suggest you start saving before they're even born
Among parents saving for their children’s college education, a stunning 95% expect to cover more than half of the costs, and a over one-third (36%) of them say they will pay the full cost, according to a study by Northwestern Mutual.
Those figures don’t surprise Molly Ward, a certified financial planner (CFP) with Equitable Advisors, who says saving for their kids’ higher education is a top priority for many of her clients who are parents. Some of them grappled with unwieldy student loans themselves and want to protect their children from becoming mired in debt.
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But to truly catch up with rising tuition costs without hurting your own financial stability, she recommends starting to save as early as possible — even if you don’t have kids yet but are planning on having them in the future.
“The sooner the better, because that's compounding interest,” Ward told Moneywise. “And if it's invested in a way that can beat that college inflation, that's a home run.”
Parents are helping their kids save for college more
Parents are opening up a growing number of 529 savings plans — tax-advantaged savings accounts earmarked for higher education — and squirreling away funds to help pay for their kids’ schooling.
As of June 2023, there were 16.25 million of these accounts open nationwide — a 40% jump from 2013, according to the College Savings Plan Network.
However, tuition prices are much higher for students today compared to many older Americans.
Between 1980 and 2023, the average price of college tuition, fees and room and board have surged by 155%, CBS News reports, citing data from the National Center for Education Statistics.
Research published by Sallie Mae shows families spent an average of $28,026 on college for the 2022-23 academic year — an 11% increase ($25,313) from 2021-22.
“The college costs can be astronomical,” Ward said. “That's not a new conversation. That's a conversation we've been having for the last 25 years because college inflation has been at a higher pace than regular inflation.”
Read more: ‘You didn’t want to risk it’: 80-year-old woman from South Carolina is looking for the safest place for her family’s $250,000 savings. Dave Ramsey responds
Why it's better to start saving early
Saving for college tuition as early as possible can provide an edge in terms of compounding.
“I started saving before my children were born,” Mark Kantrowitz, an expert on student financial aid, scholarships and loans, told Moneywise.
However, he notes it’s never too late to start saving, even if it’s just $5 a month. Several states offer income tax deductions if you contribute to a 529 savings plan as well.
“It’s cheaper to save than to borrow,” he advised, noting that parents taking out loans for their kids’ education today could end up draining their retirement savings to pay them off in the future. “So, the more you save, the less you’ll need to borrow.”
As a CFP, Ward advises parents to prioritize financial planning for their retirement, potential medical expenses and long-term care first
If you don’t have a decent nest egg to cover your projected costs in retirement, you might want to pump the brakes on helping the kids with college, she says.
“We have to hold up a mirror to [the parents’] situation. And we say if you pay for college, this is when you run out of money for yourself.”
Ward believes it’s important to have open conversations with your children and get them involved in the financial planning for their education. For example, if you’re not covering the full costs for their education, the kids can consider getting a summer job or working while attending college to fill the gap.
Don’t forget to consider the possibility your child might not actually attend college at all. With a 529 plan, it can either be liquidated with penalties and taxes or it can be transferred to a relative of the child for their own college costs.
Correction, June 27, 2024: Molly Ward represents Equitable Advisors.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
