College funding is complicated. There is no one solution that works perfectly for everyone because individual circumstances vary. So, different investment options work in different situations. One will be more appropriate for one family than for another. But there are some general guidelines and useful strategies to help you financially prepare for your children’s college education. It’s about more than just accumulating funds.
Strategically Saving for College
Parents who invest in their children’s college education often don’t go any further than simply setting money aside in a designated “college fund”. These people may be overlooking the other opportunities to help them financially prepare for their children’s college education.
Part of the problem is that some parents feel stuck between a rock and a hard place when it comes to saving. Accumulating a reasonable college nest egg can result in a reduction of available need-based financial aid. Some believe that renders saving pointless. This is why saving for college needs to be strategic.
How and where you invest can affect your children’s aid eligibility. Knowing the basics in advance can help you to build funds while mitigating any reduction in aid due to your savings. The biggest determinant of aid eligibility is your child’s Expected Family Contribution (EFC) number.
EFC is determined from personal and financial information parents and students provide each college year on the Free Application for Federal Student Aid, or FASFA. This form helps the government and colleges and universities calculate EFC. Understanding this can help you more effectively save for college. This is where a strategic approach comes in.
Whose Savings is This?
Need-based financial aid is a reality for many middle-class families. Without it their children typically cannot attend college. This is why account ownership decisions are so important. Account ownership makes a difference. This simple choice, made many years before your children apply to college, can have a significant impact on aid availability.
It is why two families with identical circumstances can have dramatically different outcomes. One family may get greater aid because of how their funds are positioned.
Many families save using either a 529 plan or an Education Savings Account (ESA). There are advantages and disadvantages to each, but 529 plans are more common. This may be because parents can contribute more to them than an ESA.
Both a 529 plan and an ESA are considered parental assets on the FAFSA. This is a good thing. Parental assets have a smaller effect on EFC than the student’s assets.
To the extent possible, assets earmarked for education should be in a parent’s name, not the student’s. But be careful. Moving assets within two years of starting college can cause other problems.
Students Saving for Themselves
You should still encourage your teens to save for their own college education. It teaches good financial habits. And depending on the amount they are able to save — and your financial situation — a 529 plan may still be appropriate. Even though the money is treated as a parental asset for EFC purposes, it is still available for the student’s use.
Having teens save for their own college education can have additional benefits. For one, it can make the high cost of college feel a lot more real. Some teens may not see $50,000 per year for college as a huge number. It may have no real relevance. Contributing a portion of the total may help put the number into perspective.
Routinely saving toward a financial goal is a lifelong habit that kids should learn as early as possible. This is one extremely important reason to have your teens save for college.
Budgeting and Planning for College
If you haven’t already done so, have your teens prepare a college budget. Have them start at about the time they start to drive. By this age they should understand personal responsibility and how the choices they make have consequences.
Their budget should address all of costs of attending college. This includes tuition and fees, books and supplies, room and board, transportation and entertainment, and other personal expenses, such as laundry.
A separate budget should be created for each school the prospective student is seriously considering. In other words, your teen should know the realistic cost of attending every school on his or her short list. This will help highlight the differences in affordability between the schools.
To help your teens prepare a budget, have them track their expenses. They should record their every purchase. This is the case even if they are spending your money. Seeing their spending on luxuries like entertainment and clothes, and necessities like transportation and parking can help them develop better habits and inform a realistic college budget.
The Responsible Use of Credit
Helping your children establish credit is an important step in their transition to adulthood. So, it should also be part of their financially preparing for college. Using credit responsibly through their college years will help them graduate with a solid credit score and pave the way for their financial future. It teaches fiscal responsibility and good money management skills.
Employment While in College
While working is important to help high school students save for college, it can also be important while they are in college. Working a few hours a week can pay for most — sometimes even all — of a student’s incidental expenses. It can also help them build good money management habits.
Research suggests that students who work a few hours a week work a few hours a week have better future employment outcomes. They may even do better in school than students who don't work.[i]
Have your teen use a spending plan for work earnings. The plan should show how money is being spent and how much is being saved.
Involve Your Children in Planning and Saving for College
These basic steps help to ensure that teens are actively engaged in financing their own education. Planning and saving for college do make a difference. Assuming partial responsibility for financing college is a great learning opportunity for young adults. They learn valuable financial life skills and gain personal satisfaction by contributing to their own education.
Victory Capital can help. Our College Savings Calculator can provide insight and help you and your teens better plan for the cost of a college education.
[i] Daniel Douglas, Paul Attewell, Assessing The Impact of Student Work During College, Rutgers University School of Management and Labor Relations, May 2019, pp 4, 7.