Financial Planning for College Involves More than Just Saving Money
Having helped three kids through college myself I can tell you that if you really want to properly prepare for your child's post-secondary education, and insure that the funds you have set aside will be sufficient, you need to help them to discover what they want to do when they grow up.
Why? Because if your child is not certain as what to they want to study to become -- by the time they graduate high school -- you can almost bet that it will take them a year or two longer to get their degree.
College Financial Planning Spoiler: When your child spends 6 years getting a 4-year degree!
Or worse, if your child ends up getting a degree for the wrong reasons (because the field pays well, easiest route to a degree, etc.), you could end up paying tens, even hundreds of thousands of dollars for a degree in a field they end up hating.
College Financial Planning Waster: When your child spends 4 years getting a degree they never use!
Therefore, in order to avoid over-paying for college or paying for a degree that is never used, your college financial planning should include helping your child to develop a clear and meaningful career path.
Help Your Child Discover a Work They Will Enjoy
In my opinion, beyond the normal responsibilities that come with raising children, the next most important thing you can do for them is to help them discover a work they will enjoy -- a work that is well suited to their talents, abilities, genuine interests, values, and personality traits.
This involves paying very close attention to things like ...
- What do they seem naturally good at?
- What do others most appreciate them for?
- What school subjects do they excel at without having to be pushed and prodded?
- What types of problems do they most enjoy solving?
- What types of magazines or books do they read without being forced?
- What do they spend their discretionary money on?
- What extra-curricular activities do they enjoy?
- Do they have a favorite hobby?
And remember, you are trying to help your child discover the service they will most enjoy providing to others, not a career that will make you as the parent happiest or proudest.
Form a Solid "Best Livelihood" Hypothesis, Then Help Them Test It
The goal should be to form a solid hypothesis as to what type of job or business your child would most enjoy by the time they enter their last year of high school -- preferably sooner.
Once a solid hypothesis is reached, the next step is to help them find ways to test that hypothesis in the real world -- without making a long term time or money commitment -- such as after-school jobs, micro-business ventures, or volunteering.
If your initial hypothesis proves inconclusive, form another hypothesis and test that one. Repeat this experimentation process until a satisfactory conclusion is reached.
Suggestions for Indecisive College-Age Students
If it turns out that your child ends up graduating high school without a self-actualizing career path in mind, my advice would be to encourage your child in one of the following directions:
- Enroll in an inexpensive online or local community college so they can work on their general education requirements while they continue their experimentation process.
- If your child is not interested in college, encourage them to learn a specific trade from a nearby vocational school. This is generally the quickest and most inexpensive route to an income level high enough to maintain the financial freedom to continue their experimentation process.
- If your child is not interested in any kind of post-secondary schooling, encourage them to seek out entry-level positions in the type of businesses they believe they would be happy owning themselves. Once they find one they truly enjoy, they can always get the necessary schooling in their free time.
Of course, no matter which direction you choose to encourage, you will always want to sell them on managing their finances in such a way as to preserve the financial freedom to follow their dreams.
The bottom line is that while some children are born with obvious talents and abilities (child prodigies), the majority are born with talents that are obscure and therefore require a process of experimentation in order to ferret them out.
Your goal as a parent should be to assist them with that experimentation process throughout their childhoods, and then encourage them to seek inexpensive ways to experiment in the real world instead of paying $25,000 a year (plus interest) to experiment as an unemployed, full-time college student.
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FAQs
Let's say you set aside $1,200 a year—that's just $100 a month—in a tax-deferred account such as a 529 college savings plan,* for a total investment of $21,600 over 18 years. If this investment earns 5% a year, you'll have about $35,400 at the end of 18 years.
How much should I save for my child's college fund? ›
For example, if you're aiming to pay for 69% of college costs at a state school, your goal is about $80,000, based on 2023–2024 data. Divide that by the number of years until your child turns 18 to come up with your annual savings goal.
How much should I contribute to a 529 college savings plan? ›
For in-state, four-year, public college: minimum $300 per month. For out-of-state, four-year, public college: minimum $500 per month. For private, non-profit, four-year college: minimum $650 per month.
How to set up a 529 college savings plan? ›
Opening a 529 can be completed in (as little as) these four steps:
- Select a plan. You'll have to choose between a savings plan or a prepaid plan. ...
- Choose a beneficiary. This will likely be your child — but remember, you can change the beneficiary at any time without penalty. ...
- Open the account. ...
- Build your portfolio.
Your 529 can be used for student loan repayment up to a $10,000 lifetime limit per individual. Up to $10,000 annually can be used toward K-12 tuition (per student). You can transfer the funds to another eligible beneficiary, such as another child, a grandchild, yourself or a friend.
What happens to 529 if kids don't go to college? ›
You can keep the money in the 529 account in the case your kid decides to pursue college or a graduate degree in the future. There is no requirement to withdraw funds at the age of 18–the money can remain in the plan indefinitely as long as there is a living beneficiary.
How much should a 12 year old have saved for college? ›
Average amount saved for college
| Average amount saved for college | |
|---|
| Age 0 – 6 | $7,929 |
| Age 7 – 12 | $15,359 |
| Age 13 – 17 | $27,559 |
| Age 18+ | $27,778 |
You can use a 529 plan to pay for qualified room and board expenses like rent, other housing costs, and meal plans. This applies to on-campus and off-campus room and board as long as you incurred the costs while the beneficiary was enrolled at school.
Is a 529 college savings plan a good idea? ›
And when you pull the funds out, as long as they're used for qualified higher education expenses, there's no federal income tax on the distribution and often no state income tax. 529 accounts also receive some favorable treatment for financial aid purposes, so they're really a great way to save for college education.
What is the 5-year rule for 529 plans? ›
Individuals may contribute as much as $90,000 to a 529 plan in 2024 ($85,000 in 2023) if they treat the contribution as if it were spread over a five-year period. The 5-year election must be reported on Form 709 for each of the five years.
Under certain conditions, you can roll over tax- and penalty-free up to a lifetime limit of $35,000 in a 529 to a Roth IRA open by the 529 beneficiary for more than 15 years, subject to annual Roth IRA contribution limits. (Note: The annual contribution limit would be the beneficiary's, not the parents'.)
How much of 529 is considered for financial aid? ›
The value of a 529 plan owned by a dependent student or a parent (529 plans do not allow joint ownership) is considered a parent asset on the FAFSA. Any parental assets, such as a brokerage account, savings account, and other assets, will reduce a student's aid package by up to a maximum of 5.64% of the asset's value.
What is the difference between 529 and college savings plan? ›
A 529 Plan can be invested into ETFs or target date funds which can offer more growth opportunities compared to a lower interest-earning savings account. Unlike a savings account that is not exposed to risk, a 529 plan can lose money since it is tied to investment vehicles.
What is the best age to start a 529 plan? ›
For most individuals, there is never an ideal time to start saving for college. The key is to avoid procrastinating and open a 529 plan as soon as you have someone to save for. If parents have their first child at age 26, the best time to open a 529 plan would be between the ages of 25 and 34.
What is the best college fund for a child? ›
- 529 plans. This may be the first thing that comes to mind when you think about college savings plans. ...
- Prepaid tuition plans. ...
- Coverdell education savings accounts. ...
- Roth IRAs. ...
- Uniform Gift to Minors and Uniform Transfers to Minors. ...
- Savings bonds. ...
- High-yield savings accounts.
In most states, that means age 18, though in some states the age threshold may be higher. The custodian can't change the beneficiary or account owner. Once the account owner/beneficiary becomes an adult, they assume control over the 529 plan.
How much does a 529 plan grow in a year? ›
Refine
| Portfolio Name | Portfolio # | 1 yr |
|---|
| FA 529 Portfolio 2025 - Class I | 3387 | +7.20% |
| FA 529 Portfolio 2028 - Class I | 3388 | +8.86% |
| FA 529 Portfolio 2031 - Class I | 3389 | +10.28% |
| FA 529 Portfolio 2034 - Class I | 3394 | +12.05% |
26 more rowsNationwide, 529 Plan savings totaled $450.5 billion in June 2023 for an average account balance of $27,741. The average account balance in mid-2023 was 9.50% lower than the all-time high average balance of $30,652 in 2021.
Is a 529 plan good for wealthy? ›
These plans are attractive for wealthy families because they provide a way for a parent or grandparent to transfer much more money to a child than they would be able to without incurring gift taxes, Stokes says. Here's how he suggests maxing out a 529.
