You get home from work one day and your child has the magical letter to open from that college or university that you both always dreamed they would attend. It's possible the school is your alma mater or perhaps it is the Ivy League university you always thought your child was possible of being a part of for the next four years. As you open the letter, you read that your child has been 'accepted' into the new freshmen class. You begin to realize that maybe you haven't done your homework on how you are going to pay for the college education. Over the next four weeks, I will examine some of key areas you need to be thinking about when you plan for this type of financial goal.
Many financial plans that I see done on families often use blanket assumptions. When you start thinking about college education planning, it is important to have lengthy discussion with your financial advisor about what you want the picture to look like so you can backtrack into the right assumptions. I have three children soon to be 14, 12, and 10, so I have known for years that kids grow too fast, college is getting more expensive, and it is never too late to start planning for their future. The good news is that you have more options than ever before on the ways you can save for this important goal. What are the key assumptions you should be thinking about for college education?
- How do you plan to finance the college education? - Essentially, there are four options you could consider about how you assume you will assist in paying for your child's college education. You could pay as you go, although I don't recommend this. This means depending that your job will make the kind of cash flow in the future you need to add college tuition as another bill. You could choose to pay later, which means borrowing or financing your kid's education like a mortgage and paying it off over time. This could hamper other goals you have like paying off your mortgage or early retirement. You could find someone else to pay, which could be a combination of relatives, financial aid, grants, scholarships, etc. which can be viable if you plan skillfully. The last thing you can do is to save for the goal, which requires important planning and discipline to reach the goal. This question is vital in building a foundation for your overall strategy.
- What do you think the rate of inflation is going to be for college costs? - According to The College Board, the average 2010-2011 tuition increase was 4.5 percent at private colleges and 7.9 percent at public universities. The ten-year historical rate of increase is approximately 6 percent. (source: www.savingforcollege.com) This 6% number is almost twice the normal inflation rate the last decade. If your financial plan has a normalized inflation rate being used across the board, this could substantially throw off the numbers of what you need to save for college. These numbers also don't include other costs your child might have like: computers, supplies, books, and transportation. Many people don't factor in these ancillary expenses when they put their plan together.
- How much of the education do you plan to fund? - For a child enrolling into a private university in 2010, the total cost for tuition is factored at about $119,400 according to www.savingforcollege.com. If the inflation rate stays at 6% this number will be over $340,000 for a child born today. So the real questions to determine when you have a new baby are, "How much of the education do you plan to fund? Do you want to plan for a public education or a private education? Do you want to fund two years or all four years? Do you just want to give your child a head start?" Answering these questions provide you a really good baseline to understand your starting point.
- Can you expect any family help? - Although this can be a difficult conversation to have with your parents or grandparents, it is a very meaningful one so you can plan for your child's future. Be sure to ask what support if any you can expect to get from family members. This isn't a selfish and greedy question. It is vital to know this so you can plan to save your kid's investments into the right type of vehicles for tax savings and liquidity depending on what the rest of your family may be doing. Sometimes parents or grandparents want to help, but they do not know the most effective way to save money and retain control of the assets.
You may realize from reading this blog that every puzzle is going to look a little bit different for every family situation. Your particular circumstances, number of children, overall asset base, income level, and many other factors will determine what the best strategy is for your family situation. It is a great idea to sit down and put a plan together just like you would for anything else you have been successful at in the past. Wouldn't be great for your child to open that letter, and you have the power to know that you planned well for that magical day!
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.
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