Private school or college? Save for both.

A solid saving strategy and the right tools can make this a possibility for parents.

25 Mar 2019

Key takeaways

  • In some states, families can now use 529 plans to help pay for both college and private K-12 education.
  • Don't overlook financial aid for college simply because you think you earn "too much."
  • Make sure you don't overlook your own long-term saving goals when saving for your children's education.

Affording college is tough enough these days, but what if you also want to send your children to private school for kindergarten through high school? It's a tall order even for families who have the means to consider this option.

However, that doesn't mean this goal is out of reach. A solid saving strategy and the right tools can make this a possibility for parents.

Saving for education is like shooting a moving target

It's no secret that higher education is a major expense. According to the College Board, average cost to attend an in-state, public four-year college is $10,230 for the 2018-2019 school year.1 That number jumps to $26,290 for out-of-state tuition, and a whopping $35,830 for private universities. And the costs are only going up. Add on the task of also paying for a private education leading up to college and things get quite pricey. The average price of a year of private elementary school is $7,770, while private high school is $13,030, according to the National Center for Education Statistics.2

“If you look at people with just high school diploma versus a college diploma, it's definitely a high return on investment over the course of their lives," says Justin Waring, UBS Investment Strategist Americas. “And most of the time, choosing private over public [secondary education] can give them a bit of an edge. So it might be worth the expense, but it's obviously a cost-benefit analysis."

So, is putting your child through private K-12 education, plus a four-year college, even realistic? The experts say it is, but only with diligent planning that starts as early as possible.

How to prioritize saving for education

If sending your kids to private school is important to you, it's something to potentially discuss before you even start a family.

“There's a huge dispersion in costs between colleges and between private schools," Waring explains. “So one of the first conversations you have to have before you even have children is how you will budget and plan for college expenses and school expenses throughout the years."

If sending your kids to private school is important to you it's something to potentially discuss before you even start a family.

That's because private education expenses can begin as early as pre-K, so it doesn't leave a lot of time to build an investment strategy. Pre-college education spans 13 years, while college is usually just four. So even if private school is considerably less expensive per year than college, your ability to compound growth for college is much greater than it is for preschool and up.

Even so, you should ensure your own saving goals are being met before you begin putting money toward your child's education, according to Ainsley Carbone, UBS Total Wealth Strategist Americas. “It's really important for parents to make sure that they're taking care of themselves first before they put forth the effort of saving everything they can for their children's education," Carbone says.

“There's a difference between urgency and importance," Waring notes. Paying for private preschool, kindergarten and elementary school are all more urgent, but saving for retirement is the bigger need. “You have to make sure that you're saving enough toward those long-term goals. Because the longer you delay them, the more of a hole you're falling into in terms of missing out on compounding growth." Plus, it's relatively cheap to borrow money to fund college, if needed, versus borrowing to cover immediate retirement needs.

Your secret weapon: a 529

When it comes to where you should put college savings, a 529 savings plan is one of the best options to consider. These savings plans are administered at the state level and allow you to contribute funds that grow tax-free. Withdrawals are also made tax-free as long as the funds are used to pay for qualified educational expenses on behalf of the beneficiary.

Congress changed 529 plan rules to benefit parents who want to send their kids to private school, too. As part of the Tax Cuts and Jobs Act that was passed in 2017, it's now possible in some states to withdraw up to $10,000 in 529 funds per year to pay for private primary and secondary education tuition.

It's important to point out that in the case of private school, money from a 529 plan can only be applied to tuition, so other education-related expenses such as supplies and field trips will need to be funded through other sources. Additionally, the costs and rules associated with plans vary by state, so make sure to compare plan options to find the one that works best with your family's financial goals.

Involving your child in saving and paying for college can be an excellent learning opportunity.

Fortunately, you can take advantage of the compounding, tax-free growth offered by 529 plans even if you aren't sure how many children you will have or how the funds will be used. “You can have anyone really as a beneficiary, and you can change it once per year," Carbone says. 

For example, you could open one account and make your spouse the beneficiary. He or she could then open a second account and make you the beneficiary.

“Getting the rest of the extended family involved can also help you to build more of these accounts so that you have the flexibility you need to meet the kids' expenses throughout their lives," Waring adds.

Bridge the gap

It may not be possible to cover 100 percent of college costs for your child, especially if you also pay his or her way through private secondary education. But that's not necessarily a problem.

When it comes to paying for college, some families follow the 1/3 rule. This means they plan to pay for college costs using one third savings, one third current income and one third student loans. While this guideline may work for some families, it isn't suitable for all. It's important to consider your family's own financial situation when determining how education costs will be covered.

Also, don't overlook financial aid simply because you believe you earn “too much." Filling out the Free Application for Federal Student Aid (FAFSA) is required to earn other types of federal aid besides need-based aid. Your child could also be awarded merit-based scholarships and grants, work-study opportunities and low-interest federal student loans (which do have to be paid back, but come with many federally backed protections).

In fact, involving your child in saving and paying for college can be an excellent learning opportunity. “I think it's definitely a good opportunity for parents to have a discussion about finances with their children," Carbone says. Even if they're not shouldering a bulk of the financial responsibility, having them participate in work-study or a part-time job to help pay for school “can help teach them the value of a dollar at a younger age."

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