Planning for the high cost of higher education

As college tuition rises, collaborative planning for your child’s education is essential.

03 Jan 2019

Key takeaways

  • With the cost of college rising faster than inflation, it’s important to begin the planning process early.
  • Begin a college savings account. The earlier you start saving, the easier it will be to reach your goal.
  • Loop in all family members who will contribute to college savings, including aunts, uncles, grandparents—and yes, the kids, too.
  • While putting your child’s well-being above your own is a noble and understandable tendency, make sure you aren’t sacrificing your own retirement savings to fund college.

The cost of college has been rising at a meteoric rate. One year of tuition at a public college costs an average of $9,716—a number that jumps to $21,629 for out-of-state students and $35,676 at private universities.1 And these figures continue to rise year-by-year at a faster pace than broad inflation; over the past 30 years, according to The College Board, tuition has doubled for private universities and tripled for public schools.2

Even for some wealthier families, covering the exceptionally high cost of higher education can seem daunting, particularly if you have more than one kid bound for college. That’s why it’s important to involve the entire family in college planning—and act early. Here’s how to ensure you’re on the right financial path to putting your children through college.

Get your finances in order

Before your family prioritizes saving for college, it’s important to first eliminate debt that’s draining monthly cash flow and eating into your returns.

Ainsley Carbone, Total Wealth Strategist Americas at UBS, notes that “sometimes, people who have a lot of debt find it difficult to take action toward paying it off because they’re so overwhelmed,” Carbone says. The key to success? “Start with the highest-cost debt and work your way down.”

Talk about who’s paying for what

It’s a good idea to loop in all family members who will contribute to college savings. That may include aunts, uncles, grandparents—and yes, the kids, too.

“The earlier you can start, the better,” says Carbone. However, you’ll want to involve your children in the conversation when they’re old enough to grasp it. If they’re expected to contribute toward college expenses, a good time to talk may be when they’re in high school and beginning to think about college.

According to Justin Waring, an Investment Strategist at UBS, you should also discuss steps your child can take to ease the burden of paying for college. For example, can they take AP classes to earn college credit for free? If they don’t qualify for scholarships, can they take on part-time work? “If they know what the financial cost is, it gives them an understanding of the consequences of their actions,” Waring notes. “If you don’t introduce them to investing and financial decisions earlier, choosing a college might be the first big adult decisions that your kids will have to make—and it’s a doozy.”

It’s also important to put a Plan B in place in the event the family isn't able to reach its best-case savings goal. “Make sure you discuss cheaper options—such as in-state public schools—as an alternative to letting your kids choose a more expensive school that will saddle them (or the family) with debt,” Waring adds.

Take advantage of tax-advantaged savings options

Waring points out that though you'll likely wait to discuss the details of the college budget while your child is in high school, you should begin a college savings account well before then—even when they're first born.

The earlier you start saving, the easier it will be to reach your goal thanks to compounding growth. “If you start making small deposits, you’ll quickly get used to living without that money,” Carbone explains. “It'll get easier and easier to increase those savings contributions over time.”

As far as where to put that money, a 529 plan can be a smart option. These special college savings accounts allow assets to grow tax free, and distributions are completely tax free as long as they go toward qualifying expenses. In many states, contributions are also tax-advantaged. And you probably shouldn’t worry too much about overfunding the account for a single child; if the beneficiary decides not to go to college or doesn’t need the money, you can change the beneficiary to another child in your family, or even to an adult considering a postgraduate degree.

Don’t sacrifice your retirement savings to fund college

A record 2.8 million Americans over the age of 60 had outstanding student loans as of 2015. Close to 40 percent of federal student loan borrowers age 65 and up are in default, which is the highest rate for any age group.3

Putting your child’s well-being above your own is a noble and understandable tendency among parents. But it’s never advisable to sacrifice your own savings to put a child through school.

One issue is that private student loans don’t have the same protections that federal student loans do, such as income-driven repayment plans and forgiveness options.

“Getting a college degree is important for your children’s success. It’s important to remember that despite the high up-front cost, college degrees are worth it over the long run in terms of lower unemployment rates and higher earnings,” says Waring. “But as the parent, you’re not directly reaping those benefits, and you have much less time than your children to recoup the cost of college.”

Before you decide how much you’re going to contribute toward your child’s college education, make sure that you work with a financial advisor to build a financial plan to help you stay on track to meet all of your retirement goals. Planning for the rising cost of college is much easier when it’s a family affair. However, if you have questions or run into challenges, it’s a good idea to bring a financial advisor into the mix to help guide you.