As parents, we all dream of providing our children with a quality education. However, this dream is continually challenged by two major forces: general inflation that affects every aspect of our lives and the rapid increase in college tuition fees. It’s like watching the price of everyday items, such as bread, increase each year, but on a much larger scale. And with greater long-term implications!
Inflating College Costs
Now, inflation is a natural economic phenomenon that affects virtually every aspect of our lives. From groceries to healthcare, the cost of living tends to rise over time. If not addressed in your financial planning, inflation can have a profound impact on your savings’ ability to cover future expenses. This is particularly relevant when it comes to saving for children’s college education, given the long-term nature of the goal. Did you know that in 1980, the annual cost for a full-time student at a four-year college, including tuition, fees, and room and board, was $10,231, adjusted for inflation, as per the National Center for Education Statistics? By the 2019-20 academic year, this figure had soared to $28,775, marking a staggering 180% increase. [1]
But let’s look at it another way. If the cost of going to college increased consistently with the U.S. inflation rate over the last 50 years, students today would be paying between $10,000 to $20,000 per year to attend public or private universities. In other words, as much as inflation eats away at savings needed for paying for college, the cost of college itself has actually outpaced inflation itself. [2]
Not Too Late
Life is unpredictable. Sometimes unexpected costs or priorities push college savings to the back burner. Many parents are in their 40s or so when they’re sending their first kid to college. Yes, they grow up so fast and, unfortunately, so does the cost of their education. But if you find yourself in the “cramming” phase, feeling like you’re playing catch-up, remember that strategy can be just as crucial as an early start. Long-term investments can still be a lifeline. Through the magic of compound interest, even funds invested later can grow significantly, offering a buffer against those rising costs. And don’t forget that a four-year college typically takes, well, four years. A lot can be done with your money over that time period, if it’s done wisely.
The 529 Plan: A College Saver’s Best Friend
If you’re exploring tools to supercharge your education fund, meet the 529 Plan. This tax-friendly tool allows you to either prepay tuition at today’s rates or invest for future academic bills. A 529 Plan offers notable benefits for education savings. Its key advantage is tax-free growth and withdrawals for qualified education expenses. These plans cover a broad range of expenses beyond just tuition, including books and room and board. There’s no age limit for using the funds, and beneficiaries can be changed if the original student doesn’t need them. Ask your financial advisor is a 529 Plan should be part of your plan to win against rising college costs.
The Grandparent Factor
Often, grandparents are eager to contribute to their grandkids’ education. Their advantage? Time. With the abilty to start earlier, they can harness long-term investments and add a valuable boost to college funds. For those grandparents reading this now, this is a good sign that you’re in line with our investment philosophy of family wealth management. A legacy is not just a term for a child or grandchild of an alum, it’s also the gift of planting the seeds for success through an excellent education.
Financial Tutors
Just as a tutor aids a student in understanding complex subjects, a financial advisor serves as your personal guide in the intricate world of investments and savings. When it comes to planning for your child’s college education, particularly if you’re playing catch-up, the insights of a financial expert can be invaluable.
With a financial “tutor” by your side, you can gain clarity, strategy, and confidence in college funding. In educational terms, you’ll be better equipped to ace the challenge.
Retirement vs. Tuition
Here’s a common worry: “Am I compromising my retirement by saving for their college?” It’s a valid concern at any age. But with informed planning and, ideally, some of the tutoring mentioned above, you can find a balance. Your future, and theirs, can both be bright. Saving for your child’s college and your retirement can be tough, especially if you start late. But it’s important to remember that every dollar matters. You might think you have to choose between college funds and retirement savings. The good news: you don’t have to. The trick is to plan carefully. Make a list of what’s most important. Talk to experts about the best way to save. They can give you tips and help you decide where to put your money. By doing this, you can make sure your child goes to college and that you have a nice retirement. Remember, with the right help and planning, you can do both. It’s all about being smart with your money.
Beyond Savings
Remember, traditional savings is just one piece of the college funding puzzle. Traditional savings are just one way to fund higher education. The college funding landscape offers various avenues like scholarships, which can significantly reduce costs based on merit or talent. Grants, another option, are based on need or academic success and don't require repayment, helping students avoid debt.
Another smart approach is considering alternative academic routes. Starting at a community college and then transferring to a four-year institution has become increasingly popular. This path not only reduces tuition costs but also allows students to obtain a similar quality of education as they would have if they started at a four-year school. By exploring all these options, families can ensure an excellent education without exhausting their finances.
The Takeaway
By accounting for inflation in your financial planning, you are taking a proactive step toward securing your child’s education and your family’s financial future. Remember to have time on your side as much as possible. Early, informed financial decisions can make all the difference in achieving your goals and helping your children realize their educational dreams. Again, the task of funding a college education, especially when starting late, can feel like a monumental financial cram session. But with the right tools, strategies, and perhaps a bit of external support, it’s entirely feasible. Working with a family wealth advisor can provide you with the guidance and strategies you need to effectively plan for your children’s (or grandchildren’s) education while also growing your family wealth. But don’t wait to get started on this assignment. There’s no professor available to give you an extension!
Sources:
[1] https://www.forbes.com/advisor/student-loans/college-tuition-inflation/
[2] College Costs Are Rising 5X Faster Than Inflation: The vital role of inflation in financial planning for children’s college expenses; Copyright © 2023 FMeX. All rights reserved. Distributed by Financial Media Exchange.
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