February 13, 2023
Paying for college is expensive, which is why college financial planning should really begin as soon as each child is born.
But, let’s be honest. Sometimes life gets in the way, and, before you know it, college is right around the corner, and you haven’t done as much college financial planning as you would have liked.
You’re not alone.
According to NerdWallet, “1 in 5 U.S. parents of children under 18 [20%] say they haven’t yet started saving for their children’s college education, but they want to.”¹
Without any college financial planning, many parents and kids find themselves in a difficult situation.
Consider these numbers from the Education Data Initiative:
- “The average cost of college in the United States is $35,551 per student per year, including books, supplies, and daily living expenses.”
- “The average in-state student attending a public 4-year institution spends $25,707 for one academic year.”
- “The average private, nonprofit university student spends a total of $54,501 per academic year, $37,641 of it on tuition and fees.”
- “Considering student loan interest and loss of income, the ultimate cost of a bachelor’s degree can exceed $500,000.”²
It’s easy to become discouraged seeing those numbers, but there isn’t one right or wrong way to pay for college.
College students pay for their schooling differently – some take out loans, others get scholarships, some have parents who pay their way, and others receive little to no help from their parents.
Now that your student is quickly approaching their college years, it is time to do some college financial planning together.
#1 Start Saving ASAP
Ideally, parents should start saving for college when their children are little. The sooner you start contributing to a college savings account, the more you’ll have saved.
Consider opening a 529 college savings plan. This type of investment plan lets you withdraw funds tax-free for college expenses.
You can contribute up to $300,000 in most states.
Even if you start saving toward the end of their school years, it will still make a dent in what they’ll owe during their college years.
#2 Keep Saving for Retirement
A college savings mistake some parents make is to stop saving for their retirement to start saving for their child’s college.
This is a big no-no, but we understand.
As a parent, you want to take care of your child.
But, think of it this way. If you don’t save for retirement, it means your child will one day have to take care of you.
Instead, look for ways to contribute to both – your 401(k) and your child’s college savings.
[Related Read: Saving for Retirement vs. College: Which Is the Best Choice?]
#3 Have the College Money Talk with Your Kids
One of the most important parts of college financial planning is talking to your kids about it.
Don’t make the mistake of allowing your child to think you are going to pay for college in its entirety when that’s not your plan.
One survey found, “Although 48% of teens expect that their parents are going to cover their college tuition, only 16% of parents say they’re planning to foot the bill entirely.”³
Yes, it is an awkward conversation to have, but it is a must-do for college financial planning purposes.
Talk to your kids about how much you are willing to contribute and what you can and cannot afford.
For example, you don’t want to take your child on a college tour to visit schools that are well out of your price range – unless you’ve made it clear you can’t afford it, and they can only go if they pay their own way or get a scholarship or aid.
[Related Read: Reality Check – Why You Need to Talk to Your Child about Paying for College]
#4 Talk to Your Kids about Their Financial Responsibility
While you are speaking to your kids about what you are willing to contribute to their college expenses, it is a good time to talk about your expectations of them.
Marie O’Malley, senior director of consumer research at Sallie Mae, says, “Still only seven to 10 percent of families have had a conversation with their teenager who is going to college in the next one to four years about the fact that the child has some responsibility.”⁴
For example, are you expecting your child to pay for any college extracurriculars, such as Greek life, spring break trips, or study abroad?
If you are paying tuition, will your child be responsible for paying for room and board?
Are you providing your child with an allowance during college? What will you expect him to use this money for (gas, groceries, entertainment, etc.)?
#5 Know the True Cost of College
The price a college lists in its brochure is seldom what a student pays to attend. These are ballpark figures.
In contrast, the net price calculator allows students to enter specific information about themselves to discover a closer approximate cost.
Any college that participates in federal financial aid programs is required to have a net price calculator on their website.
The net price calculator is a calculator that provides the net price or “the amount that a student pays to attend an institution in a single academic year AFTER subtracting scholarships and grants the student receives.”⁵
Encourage your child to do price comparisons when “shopping” for colleges.
#6 Ask for College Contributions as Gifts
Throughout the high school years, ask family members to give college contributions as gifts for birthdays, holidays, and graduations.
For example, grandparents can deposit directly into 529 plans or buy non-cash college gifts like computers or textbooks.
#7 Avoid Paying from Your 401(k)
You may be tempted to withdraw from your 401(k) to pay for college.
The problem with this is that, depending on your age, you may be hit with a withdrawal penalty.
In addition, you limit the growth of your retirement assets and may find yourself lacking what you need during retirement.
There is an option for a 401(k) loan, but there are stipulations, such as paying it back within 5 years.
[Related Read: Why a 401(k) Withdrawal Should Be Your Last Resort]
#8 Help Kids Create a Budget While in School
Before you drop your kids off at college, you need to teach them how to budget.
You don’t want them to blow through their college savings account in the first semester eating out and buying things online.
Go over what they are responsible for paying each month so they can save accurately.
#9 Explain the Ins and Outs of Student Loans
When the time comes to fill out the FAFSA, do it with your child.
Don’t simply fill it out yourself.
Walk your child through the loan process and explain what everything means.
If your child will be expected to pay back the loans independently, he or she needs a good understanding of what these types of loan repayments will look like (i.e., how much each month for how many years and how interest accrues).
#10 Encourage Kids to Work Part-Time
Encourage kids to work part-time to help cover college costs.
It’s actually proven to be beneficial – and not just financially.
CNBC reports, “Not only can a side gig help pay for college costs, but students working up to 15 hours a week are more focused in class as well, resulting in higher GPAs than students who don’t work at all.”⁶
They won’t be the only kid working – almost 70% of college students work while taking college courses.⁷
#11 Calculate Your New Budget
Take into consideration what your new budget will look like.
For instance, if your child is in college, you will no longer pay for as many groceries at home or sports.
Can you take the money you would use to pay for things while your child was living at home to help pay for college expenses?
#12 Speak to a Financial Advisor
It’s always a good idea to speak with your financial advisor about suggestions for paying for college.
They’ll help you strategize withdrawals and make college financial planning less stressful.
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