When my wife and I found out we were expecting our first child, we took a few weeks to just enjoy the news. Coincidentally, we had a vacation to Hawaii planned, so we got to enjoy what turned out to be a week-long babymoon. I remember conversations about what our new life might look like, and the excitement of telling close family. But we’re both planners, so it wasn’t long before we started preparing for our baby’s arrival. We started preparing the nursery, finishing up some home projects that we knew we wouldn’t have time for once baby arrived, and deciding how much to *gulp* save for college.
The Inflating Cost Of College
Most people don’t start planning for college before the baby is born. There are good reasons for doing that. You need to make plenty of other money decisions (download our new baby checklist on this page), and there are just so many unknowns before the baby is born. But I wanted to get an early start. Compounding is an investor’s best friend and is necessary to combat inflation. In fact, I opened an account in my own name for our baby’s college expenses before she was even born. Then, once she had her own social security number, I transferred the account to her.
Compounding and starting to save for college early is important, though. College costs have risen substantially in the past few decades, and that could continue. Inflation for college tuition and the total cost of college is roughly twice the inflation rate of general inflation…around 6% college tuition inflation compared to 3% general inflation. Inflation will eat up the returns of an investment account. If you expect 7% returns from the stock market, but 6% inflation, your inflation-adjusted returns aren’t much. Effectively what that means is if you want to build up a college savings account, you’re going to need to rely on your own contributions. You won’t be able to count on stock and bond returns to pay for the real cost of college because your returns are just offsetting inflation. Therefore, getting started early is important.
Save For College Based On Your Goals
So, what did the conversation look like with my wife and I when we started figuring out how much we were going to save for college? We started at the same place we start our clients. What’s our goal with trying to save for our child’s college education? This starts at a high level. For example, if you went to college, what did your parents or grandparents provide for you, if anything? Did they pay for everything? A portion? Did you have to work to pay for your education? What did you like or dislike about that?
Some parents don’t want their children to have to deal with the burden of college debt. Others want to their children to learn about managing debt after graduation. Some parents want to provide a head start for their children. They want their children to be able to start saving for retirement or for a new home right when they enter the workforce. Other parents want to focus on teaching their children the importance of working. They want their children to have some “skin in the game” and pay for a portion of their education. Still other parents don’t want their children to think college is the end-all be-all. They want their children to have the option of learning a trade instead of going to a university.
Continue The Conversation With Your Spouse, Partner, Or Yourself!
You could also discuss the mechanics. Did your parents use a 529 college savings plan? A UTMA account? Parent Plus loans? Did they loan money directly to you and you paid them back? Maybe they paid for all of your tuition, but none of your room and board. Maybe they paid for 2 years at community college but then made you pay for 2 years at a university.
Often times, parents don’t have these types of discussions with each other until they start deciding how much they want to save for college. There’s no reason to feel guilty about that. After all, maybe it hasn’t been important until that decision comes up. But as with all things budgeting, when spouses are deciding on amounts, it can be a great opportunity to learn more about the other spouse. When they tell you what they want or value, ask them follow-up questions. Repeat back what you heard so that they have an opportunity to correct you if you didn’t catch what’s important. This also demonstrates that you are listening. When both spouses feel heard and understood, there’s less of a chance for combat. Disagreements may still happen, of course. But, compromise and shared goals work best when both partners know they have been heard.
Research The Cost Of College
Okay, enough therapy for now. What happens once you decide on what you want to provide, generally speaking? Let’s say you want to go for the whole nine yards – pay for four years of tuition at an private university, along with room, board, books, fees and “other” costs like a new laptop and other supplies. Next, find out how much that will cost you. There are a few different college databases that supply estimates for various colleges, but in my experience, they usually require you provide some information about yourself, or they’re trying to sell you a product.
If you’re doing the research on your own, the most accurate way to find out is to visit a college or university’s website. They typically will have a cost estimator. If you’re wanting help with any of this, you can have us at Flagstone use the database we pay for, and you can also stop reading this because really, we can do the whole calculation for you, not just find the cost of college!
Do The Math
Anyway, if you’re the DIY type, find the cost of a college that you want to be able to pay for. Don’t overlook the expenses I mentioned above that aren’t related to tuition, like room and board, etc. Then assign an inflation rate to those expenses to figure out how much the FUTURE cost of that college will be. Finally, perform a time value of money calculation to figure out how much you need to save each month (or year, or in a lump sum) in order to build an account that is enough to pay for that future cost of college. Not a finance expert? No problem. There are many college cost calculators out there that are pretty decent. Savingforcollege.com is a popular college savings website that has a calculator that will walk you through the calculation. Just beware the site is heavily sponsored.
Refine Your College Savings Goals
Don’t be surprised if you discover that the monthly savings requirement to meet your college savings goal is unaffordable. My wife and I found ourselves in that very spot last year when we did the math. We had initially talked about wanting to provide four years of tuition plus two years of room and board at an in-state university, but that was simply more than we could afford. So, we revised our expectations and lowered our goal to just four years of tuition.
Don’t get too down on yourself if you can’t afford to save what you want to be able to save. Your income might rise in the future, which means you might be able to afford to save more in the future. And I haven’t even talked about scholarships or grants, which can have major effects on the need to save. Grandparents provide funds for some students, too. Many students pay less than the “sticker price” if they’re savvy with college selection and scholarship applications. And, who knows? Maybe government (and in effect, taxpayers) will end up paying for college instead of the student, depending on where policy goes in the future. There’s just not enough time to discuss it all.
Don’t Sacrifice Your Retirement To Save For College
One final note – don’t get off track of your own retirement in order to pay for your children’s college. If you run out of money and need support during retirement because you robbed from your own retirement to pay for your child’s education, your kids might feel obligated to help you out. That means paying for their college might end up being a burden for them, not a blessing.
Understand other effects of saving for college. Beyond the retirement issue, you might also want to consider the tax effects or the lifestyle effects. For example, what if you could afford to save for a private school, but it meant you wouldn’t have enough money to go on family vacations? Is that a trade-off you want to make? Maybe so! But that money you start contributing has to come from somewhere, so it’s important to understand the opportunity cost. If you want someone to help you through these decisions, along with countless other money decisions, don’t hesitate to reach out to us and see if we can help.