College is an exciting time in your child’s life. It represents a period during which they are spreading their wings, expanding their horizons, and exploring the opportunities that will come to define them. As a parent or grandparent, we want our children or grandchildren to have the best opportunities available to them. More often than not, when it comes to a college education, this opportunity comes at a major cost.
It is no secret that college is expensive. Tuition prices are rising every year, making it imperative for parents, grandparents, and caregivers to begin saving now if they plan to cover or help support higher education expenses. Typically, the best way to save for future college costs is to use a college savings account.
Key Factors Affecting College Savings Plans
There are a number of factors that should be taken into account when creating a college savings plan.
Number of Children
The first thing you’ll need to consider is how many children you will be putting through college. This will provide the foundation for gaining a better understanding of how much you need to set aside, and how long it will take to save enough to comfortably cover their degree.
Time Until They Enter College
A second deciding factor in determining how aggressively you need to begin saving for college expenses is how much time you have. If your children are young, you’ll be getting an early start and will be able to craft a long-term strategy for building a sufficient college fund. If your children are older, you may have to invest more heavily to ensure that you are positioned to meet their financial needs.
Private or Public Universities
When creating a college savings plan, it is important to get a good grasp on how much college tuition will actually cost for your children or grandchildren. A major factor influencing this is whether they will be going to a public or private university. According to a report by College Board, tuition at a non-profit four-year private college costs an average of $34,740 per year. Contrast this with the tuition at a public, in-state four-year university, which averages $9,970 per year. If you were to factor in other costs, such as room and board, books, and transportation, the costs jump up to $50,900 for private schools and $40,940 for public schools.
With tuition at private schools being over three times as high as a public university, it is especially important to have a clear understanding of what type of institution you would like your children or grandchildren to attend.
Where Will They Be Attending College?
The choice of where your children will be attending college can be an important factor to consider when assessing college costs. There are significant differences in tuition costs between in-state and out-of-state tuition. According to the College Board report, in-state tuition at a public four-year university averaged $9,970 per year. The average cost of tuition at an out-of-state public four-year university is quite a bit higher at $25,620.
Other Factors to Consider
In addition to determining whether you will want your children or grandchildren to attend a public or private university, a two or four-year program, or an in-state or out-of-state college, you will also need to consider some other factors that will affect how you approach your savings plan.
The first is how deeply you will be financially involved outside of covering school tuition. College degrees come with a variety of ancillary expenses associated with it. Textbooks and supplies cost the average student at an in-state four-year university $1,298. It should also be noted that textbooks prices have steadily risen over recent years, from $57 for a new textbook in 2007 to $80 in 2015.
Expenses for room and board are also a key factor to consider. The average cost of room and board at a four-year in-state university is $10,800, making it more expensive than the school tuition itself.
Lastly, you should take into account that college expenses have risen over time. This rise has been rapid over the past few decades but has recently begun to slow. This is clearly visible when looking at the inflation rate of college tuition over recent years. In January 2008, college tuition was 6.4% higher than the preceding year. In contrast to this, tuition costs in January 2018 were only 2.2% higher. Whether this trend continues or not remains to be seen, however, one should carefully consider rising college tuition costs over time when creating a college savings plan.
Different Types of College Savings Accounts
There are several different account types to consider when saving for your child’s college education. They include a 529 College Savings Plan, Coverdell Education Savings Account, UGMA/UTMA, College Savings Trust, and a Roth IRA. Of these different options, we almost always recommend our clients use a 529 College Savings Plan. The 529 savings account offers a number of benefits, including the fact that any earnings are tax-free, as are any withdrawals for qualified higher education expenses.
While California does not offer any state tax incentives, most states allow their resident participants to make tax-free contributions into their plans. As with any other type of financial advice, any official recommendation depends upon the individual’s financial situation. A careful consideration of the individual’s tax status, income, time horizon, risk tolerance, and financial goals is required when making a recommendation. Contact us today to learn more about how we can help you!