If you’re like many parents, planning for the cost of your child’s college education is a top priority. The cost of higher education is rising, so the sooner you start saving, the better.
But figuring out the best way to achieve such a big goal can feel complicated and confusing. Fortunately, you don’t have to go through the process alone; a financial advisor can help you.
A financial advisor can create a customized strategy that takes into account specific factors, such as your financial situation, time horizon and risk tolerance, to help you maximize the growth of your child’s college fund.
Why saving for your child’s education is important
There’s no way around it: studying is expensive. Although paying for college is a major financial concern for many parents, an early start can help ease the burden of high debt later on for both you and your child.
Despite concerns that savings could impact student loan eligibility, most assets are treated generously in aid calculations, and merit-based aid such as grants remains unaffected.
However, scholarships rarely cover the full cost of college. Even with a full-ride grant, additional costs such as room and board, books and transportation remain. In most cases, families will need to contribute some money toward the cost of their child’s college education, so it’s smart to start preparing now.
How a financial advisor can help you save for your child’s college fund
A financial advisor can play a crucial role in developing a customized savings strategy for your family. Their expert guidance takes into account the rising costs of higher education and your financial goals. They can advise you on when to start saving (spoiler alert: the sooner the better), the ideal savings amount, and the most appropriate college funds to consider.
Here are four ways a financial advisor can help you save for your child’s future.
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Understanding different savings options
There’s more than one way to save for college. A financial advisor can work with you to review a range of savings and investment accounts, including 529 plans, Coverdell Education Savings Accounts (ESAs), UTMA/UGMA custodial accounts and even Roth IRAs.
Each account has unique benefits, limitations and tax implications. For example, a 529 plan is a tax-advantaged investment account that allows money to grow tax deferred, and distributions for qualified education expenses are tax-free. Contributions to a 529 plan are not deductible on your federal income tax return, but many states offer income tax deductions or credits for contributions to a 529 plan.
Understanding Financial Aid and Scholarships
Financial advisors also bring clarity to the complexities of financial aid, scholarships, and grants by helping you understand how your personal savings and assets can impact your child’s eligibility.
For example, UGMA/UTMA custodial accounts may negatively impact financial aid for more than 529 plans. UGMA/UTMA custodial accounts can reduce a child’s financial aid amount by 20-25 percent because these accounts are considered assets of the student, not the parent. Meanwhile, only 5.64 percent of assets within a 529 plan count toward determining federal financial aid.
So if you have $10,000 in a 529 plan, it could reduce your aid package by $564, while $10,000 in a UGMA/UTMA custodial account could reduce your child’s aid by $2,000 or more.
Although having a college savings fund may reduce your child’s eligibility for federal aid, the benefits of having a college savings fund almost always outweigh the potential reductions in financial aid.
Balancing college savings with other financial goals
Saving for your child’s education is important, but don’t neglect other financial priorities, such as saving for retirement and paying off debt.
A financial advisor can help you balance your various financial goals by analyzing your income, expenses, and time horizon before creating a detailed financial plan for your future. This way you can be confident that you are making progress on all fronts, without compromising one goal for another.
Regularly evaluate and adjust your plan
Finally, a financial advisor can help you regularly review your college savings plan and adjust it as necessary. As your child grows older or your financial situation changes, regular check-ins with an advisor will ensure your plan stays on track and is adjusted over time to align with your changing goals.
Savings tips for parents for parents
Working with a financial advisor can streamline your college savings strategy, but there are steps you can take today to reach your goal faster.
Here are some additional tips for parents.
- Start saving early and consistently: Even if you only contribute small amounts, getting a head start can help you build your savings and grow them over time.
- Save any windfalls: Making a plan to contribute some of the “extra money” you receive, such as a tax refund or work bonus, can help accelerate your savings rate.
- Create a realistic savings goal: It can be difficult to raise enough money to finance your child’s entire college experience. A better approach is to set a realistic savings goal, even if it isn’t enough to fund a full ride to an Ivy League school. Experts recommend setting aside about 50 percent of your study costs. The rest can come from loans and grants.
- Take advantage of tax-advantaged savings accounts, such as 529 plans: These savings vehicles offer many benefits, including tax-free growth within the account. They also have no income or contribution limits.
While it’s ideal to start early, keep in mind that it’s never too late to save for your child’s education. Consistently putting aside everything you can afford will add up over time and ultimately make a difference in your child’s future.
In short
Saving for college is an ambitious – but not impossible – financial goal. Working with a financial advisor can make that goal a reality. An advisor can help you navigate all your options, including different account types, tax implications and how to balance college savings with other financial priorities. With the right strategy, you can grow your child’s college fund over time and set them up for a successful future.
