Life Planning

Education Savings: How parents can plan for the future

Tags: College planning, Children, Investing, Saving, Student loans

As a parent, you work hard to provide the best for your children— that means thinking about their day-to-day needs, of course, and looking to the future and what might be required to ensure their access to higher education. With college tuition always increasing— the average cost of public out-of-state tuition and fees for 2023-24 was $23,600 and private was $42,162— the earlier you begin saving, the better.

Understanding the current landscape of higher education

In recent decades, the costs of attending college have surged, more than doubling since 2000 and increasing by 6.8% annually. Beyond tuition, higher education costs also include books, technology needs and supplies, room and board, transportation costs, and other expenses that will vary based on the type of program or institution you choose.

Additionally, the demand for skilled labor across many industries has driven up the demand for trade school programs, reflecting the value placed on specialized training. Trade schools, or vocational, programs prepare students for specific skilled trades and tend to be shorter programs of study than traditional four-year universities. These programs are also significantly less expensive— while college expenses can easily top $100,000+ for a four year degree program, average yearly cost for trade school can range from $3,600-$16,000, depending on the program.

Importance of early planning

Getting a head start on saving for your children's higher education expenses is one of the best decisions you can make for your family, and your children’s future. One major factor to consider is the power of compounding interest. By beginning to save early, even with modest contributions, your money has more time to grow over the years. This means that the earlier you start, the more significant the potential growth of your savings by the time your child is ready for college.

Early savings can also help mitigate the need for student loans, which can otherwise burden graduates for many years after graduation— borrowers have an average of $37,088 in student loan debt. By building savings over time, you can help alleviate the financial strain on your child and yourself.

Starting early also provides you with greater flexibility in choosing the right college or university for your child, as well as opening up the possibility of other educational opportunities such as internships or study abroad programs. By using tax-advantaged savings vehicles like 529 college savings plans, you can help grow your savings while minimizing tax liabilities. Finally, starting early instills valuable lessons about financial responsibility and planning for the future, benefiting both you and your child in the long run.

Financial planning strategies

To get started in saving and investing for the future educational needs of your family, your best ally is a trusted financial professional. They can be your guide through budgeting, choosing the right saving and investment vehicles, and making strategic changes based on changing needs and goals over time. To familiarize yourself with options, review these common investment and savings vehicles used to prepare for future education costs, along with their benefits:

529 college savings plan offers:

Tax advantages: Contributions may be deductible from state taxes, and withdrawals are tax-free if used for qualified education expenses.
Flexible use: Funds can be used for qualified expenses at any accredited college, university, or vocational school in the United States.
High contribution limits: Some plans allow for significant contributions, enabling substantial savings growth over time.
Control: The account owner retains control over the funds and can change beneficiaries if needed.

Coverdell Education Savings Account (ESA) offers:

Tax-free growth: Similar to a 529 college savings plan, earnings grow tax-free if used for qualified education expenses.
Flexibility: Funds can be used for both primary and secondary education expenses, as well as higher education.
Wide investment options: ESAs offer more investment options compared to 529 college savings plans, including stocks, bonds, and mutual funds.

Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) Accounts offer:

Flexibility: While not specifically designed for education, these custodial accounts can be used for any purpose that benefits the child, including education expenses.
Tax benefits: The first $1,250 of unearned income is tax-free, the next $1,150 is taxed at the child's rate, and any income over $2,300 is taxed at the parent's rate.
Control: The custodian controls the account until the child reaches the age of majority, typically 18 or 21, depending on the state.

Savings Accounts and Certificates of Deposit (CDs) offer:

Safety: Savings accounts and CDs are low-risk options for saving for education costs, as they are typically insured by the FDIC up to certain limits.
Accessibility: Funds in savings accounts and CDs are easily accessible when needed for education expenses.
Stability: While they may offer lower returns compared to other investment options, savings accounts and CDs provide a stable and predictable way to save for education.

Education Savings Bonds (Series EE and Series I Bonds) offer:

Tax benefits: Interest earned on education savings bonds is tax-free if used for qualified education expenses.
Security: Backed by the U.S. government, education savings bonds are considered a safe investment option.
Flexibility: Bonds can be purchased in relatively small denominations and redeemed after a minimum holding period, making them accessible to most savers.

Each of these investment and savings vehicles offers unique benefits, allowing individuals to choose the option or combination of options that best align with their financial goals, risk tolerance, and timeline for education expenses. A financial professional can help you and answer all your questions.

Resources and tools for education planning

With an understanding of the options for saving and investing you will want to look at your family’s overall financial picture while discussing your and your children’s goals and aspirations for the future. If your children are very young, these conversations will likely change over time as they figure out for themselves what they want to do and which type of educational model fits best. Some tools and practices you should consider using include:

Online calculators: can help you estimate future education costs including tuition, room and board and other contingencies.
Creating a Comprehensive Education Savings Plan: Setting realistic savings goals based on anticipated costs and family finances is an important step in your comprehensive education savings plan. Regular monitoring and adjustments to the plan over time will help ensure that it remains aligned with your financial goals and objectives.
Work with a financial professional: An experienced professional can work with you to develop strategic plans based on your estimated costs and help set up and evaluate your comprehensive education savings plan, as well as modifying over time if needed.
Involving Children in the Discussion and Teaching Financial Literacy: Involving children in education savings planning from a young age can instill responsible financial habits and goal-setting skills. Age-appropriate discussions about the value of saving and investing for education can empower children to take an active role in their own financial future.
Be Prepared for Challenges and Roadblocks: Unexpected financial setbacks can derail even the best-laid plans, but your financial professional can help guide you through these challenges and adjust your savings plan accordingly. You may consider alternative education pathways, such as community college or vocational training— both excellent options for achieving higher education goals.

Planning for your children’s future education is one of the most significant ways you can help provide for their future success and long-term stability. It’s also a major undertaking that requires careful consideration and proactive steps. By starting early, and seeking guidance from professionals, you can help secure your children’s access to higher education and set them on the path to success.

Today is the perfect day to reach out to a financial professional to discuss your education savings plans and develop strategies for achieving your goals. Your children’s future education is worth the investment.

This informational and educational discussion is not intended – and should not be relied upon – as investment or financial advice. Investing involves risk, including loss of principal invested, and you should carefully consider your own time horizon, goals, objectives and tolerance for risk before investing. Asset allocation does not guarantee a profit or protection against loss in a declining market. Past investment and market performance does not guarantee future results.