How to Plan Financially for College, from Cradle to Graduation

Wed, 03 Apr 2019

A crash course in funding an education

The cost of college by the year 2030 may have parents reaching for a pacifier. U.S. News reports:

“According to the US Department of Education, the average annual cost of public school increased 6.5 percent each year over the last decade. That means that by 2030, annual public tuition will be $44,047. The total cost for a four-year degree will be more than $205,000.”

A private university, of course, will likely be substantially more.

Of course, that doesn’t include spending money for social activities. The University of Michigan estimates that a college student will part with another $6,406 over a four-year period. That’s above and beyond tuition, books and living necessities.

And that’s for just one student.

But don’t be disheartened. You can take baby steps now toward savings that can pay off in a big way when it’s time for college.

How much should you save?

Look at how small amounts, invested consistently, can create a sizeable college fund:

If you save $200 a month for your newborn child, invested at a 6% annual rate of return, it will grow to more than $76,000 by age 18. That’s the power of compound interest.

Any amount, no matter how little it may seem, can create a nest egg if you save faithfully, month after month.

How much will you specifically need? Try this calculator.

  • Know where you want your child to go to college? Find the current cost on the National Center for Education Statistics' school locator.
  • Not sure where you’ll send your child? Get national public and private school averages from The College Board.

How much should you borrow?

If you’ve had sticker shock over tuition costs, the figures on student loan debt won’t be much comfort.

Today, students on average graduate with $29,800 in federal and private student loan debt. (Not to mention the loans their parents take out.) Compare that to the mean credit card debt in the U.S.--$5,700, according to the Federal Reserve.

And that’s today, not 2030.

Right about now, parents may be hoping their child grows into an All-American fullback or a second Stephen Hawking. But just in case the big scholarships don’t come to pass, you need a plan.

That means loan decisions are going to be an even bigger deal as the years progress. Right now, according to Nerdwallet.com, “Undergraduates can borrow up to $12,500 annually and $57,500 total in federal student loans. Graduate students can borrow up to $20,500 annually and $138,500 total.” (Note: Private student loan limits depend on the lender.)

The operative words are “can borrow,” not “should borrow.”

But Webster offers help to plan your way past the obstacles and point you towards success.

Types of college savings plans

You have a range of options for college savings plans; your choice depends on your specific circumstances. Let’s take a closer look:

  • 529 Education Plans

As you save for private high school or higher education costs, your contributions grow tax-deferred, for both state and federal income tax. In fact, your contributions get a state tax deduction. When it’s time to withdraw funds, you don’t pay taxes on the growth in your account, so long as the money is used for qualified expenses. Up to an annual maximum of $15,000 for 2019, there are no restrictions on contributions to a 529 plan.

However, your state may offer benefits—financial aid, scholarships and protection from creditors—that are only available for investments in the state’s qualified tuition program. Before you choose a 529 plan, make sure you aren’t excluding the chance to gain these benefits.

  • Uniform Gifts to Minors Act (UGMA)

This act allows you to donate assets to be held in a custodian's name for your student without requiring a trust fund. It can offer a tax-advantaged way to build college funds. One caveat: UGMA assets may impair the ability to qualify for a college’s financial aid program.

  • Coverdell Education Savings Accounts

Like 529 plans, Coverdell accounts help pay for education costs through tax-free earnings growth and tax-free withdrawals for qualifying expenses: tuitions, books and uniforms, for example. They have lower maximum contribution limits than 529 plans.

Will your child be eligible for financial aid?

That will depend on the assets you have available—and who owns them. According to FINRA, the Financial Industry Regulatory Authority: “Savings in a parent's name may reduce federal financial aid eligibility by at most 5.64 percent, but assets saved in a child's name may reduce aid eligibility by 20 percent. State 529 accounts owned by a child, or set up as custodial 529 accounts, are treated at the lower 5.64 percent rate.”

Give the gift of education

Grandparents and other members of your family may want to contribute to your child’s education—and those gifts can be far more meaningful than toys. But keep this caveat in mind:

If grandparents open and own a 529 plan, those assets don’t factor into a child’s financial aid calculation. However, distributions from that plan can reduce your student’s eligibility for financial aid. Fortunately, new rules for FAFSA, the Free Application for Federal Student Aid, can mitigate the impact.

All the more reason to bring a financial consultant into your planning.

Help is here.

Your Webster Banker can help you determine which approach makes the most sense for your specific situation. Meet while your child is young so you have the benefit of years of compounding. But even when your child is older, a financial specialist’s advice can be essential to capitalize on every saving and borrowing option available.

Request a planning session. It can be an eye-opening education to options you may not know about—and a path forward with confidence.

The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. All loans are subject to the normal credit approval process.

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