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How Much Should You Save For Your Child’s Education?

How Much Should You Save For Your Child’s Education?

May 22, 2024

Every spring, as high school and college graduations take place and our social media feeds are full of young adults launching into their next phase of life, parents and caregivers of younger children give even more thought to saving for their family’s higher education. It can be a bit daunting, especially as the cost of tuition escalates.

A study in 2023 found that the average annual cost of college in the United States ranges from approximately $26,027 for in-state students at public colleges to nearly $55,840 for private colleges1. Those figures can get even more intimidating when you consider the impact of future inflation. 

We recommend that growing families start saving early and create strategic approaches to fund higher education. Here is some advice on how to think about and save for your child or grandchild’s education.

Understanding the Cost of College

The first step in planning for your child's education is understanding potential costs. These include not just tuition, but also room and board, books, supplies, and other related expenses. Costs vary significantly based on the type of institution—public or private—and whether the student attends in-state or out-of-state. Here are some helpful tools to get an idea of what these costs may be.

Setting Realistic Savings Goals

It’s certainly a balancing act to fund your savings program sufficiently without overfunding in a way that requires you to make unsustainable financial sacrifices in the short term. We can help you find a strategy that works for your goals while not negatively impacting the present.

For example, for some families, we suggest strategies such as aiming to save enough for your child to go to a public school. From there, they can potentially get scholarships or take out student loans if it’s decided that they will go to a more elite university or longer programs such as medical school. This may be a more realistic goal depending on the circumstances and will still set your child up for a bright future.

Regardless of the amount, regular contributions, even small ones in the earlier years may significantly grow thanks to compounding interest. Setting up automatic monthly transfers to dedicated education investment accounts can help build these savings consistently over time.

Weighing Key Benefits of 529 Plans

We often get asked about 529 plans when it comes to saving for college, and they are some of the most ubiquitous college funding programs. What primarily sets them apart from other options is their tax advantages.

  • Your contributions grow for years in a tax-deferred manner.
  • Withdrawals for qualified education expenses are exempt from federal tax.
  • Many states also offer tax deductions and credits for contributions.

In addition, the plans offer high contribution limits without restrictions based on your income. And, it’s not just parents that can contribute to these accounts. Grandparents, aunts, uncles, and others can utilize college savings accounts as part of their financial strategies, with the beneficiaries being the children once they head off to school. Anyone who contributes to the beneficiaries’ 529 will also realize the tax benefits.

529 Plans Offer Flexibility for Non-traditional Paths

529s also recently underwent some changes, making them more flexible than in previous years. These changes give families options if a child ends up pursuing a different path such as trade school because the funds can be used for nontraditional education as well, such as 2-year schools and trade programs. They also offer tax advantage withdrawals for expenses, such as room and board, textbooks, computers, and supplies. You may also be able to use the funds for K-12 private school tuition (up to $10,000, with other tax limitations).

Furthermore, if the beneficiary decides not to pursue higher education or receives a full scholarship, the plans permit a penalty-free Roth IRA rollover to another family member or even yourself. This is a good option for larger extended families or if you’re a lifelong learner. Just keep in mind that there is quite a bit of paperwork involved in this process and you are limited to a transfer amount of $35,000 total over the lifetime. Also, your 529 plan must be at least 15 years old, and changing beneficiaries could restart the clock.

Tailoring Your Savings Strategy with Expert Guidance

Every family has unique needs, and raising a family is expensive. It’s not always easy to save huge amounts with daily expenses such as childcare, activities, and other expenditures being so high. We recommend working with a financial advisor in the early years to set a plan that will help you balance your short-term expenses with your long-term educational goals along with income planning to help you stay on track. Plus, a one-size-fits-all approach may miss opportunities to save in a tax-efficient way. A skilled advisor can also explore options outside of 529 plans, including other investment products like IRAs and additional saving strategies.

Overall, saving for higher education and even trade school requires getting an early start, a disciplined approach, and a smart mix of strategies. Contact us today to start building your roadmap. After all, the more you save today, the less your children will need to borrow in the future.

1Educationdata.org, 2023

Units of the 529 plan investment options are municipal securities and may be subject to market value fluctuation. Before investing in a state specific 529 plan, you should compare your own state's qualified tuition program and any state tax or other advantages it may provide. Subject to certain restrictions. By investing in a plan outside your state residence, you may lose available state tax benefits. 529 plans are subject to enrollment, maintenance, administration/management fees & expenses. Make sure you understand your state tax laws to get the most from your plan. If you make a withdrawal for any other reason, the earnings portion of the withdrawal will be subject to both state and federal income tax & a 10% federal tax penalty. As with any investment, it is important to fully consider the plan’s objectives, risks, charges, and expenses before investing. Retirement plan withdrawals may be subject to taxation and penalties when withdrawn early.