Laying the Financial Foundation for Your Child’s College Education

What You’ll Learn: This post will guide you through the financial planning and decision-making processes, guiding you through the Journey of College Planning, highlighting:

• The staggering costs of higher education and the rising student debt.
• Step-by-step guidance on setting up and contributing to a 529 college savings plan.
• Strategies for incorporating financial gifts into your child’s college fund.
• Tips on engaging your child in financial literacy and discussions from an early age.
• How to reassess and adjust your savings strategy as your child grows and as tuition rates change.

Welcome to the Journey of College Planning

As parents, we often dream about our children’s futures from the moment they arrive. Yet, amidst the joy and chaos of early parenthood, planning for college can seem a distant priority. However, with student debt currently soaring to $1.8 trillion and college tuition rates climbing, early financial planning has become more crucial than ever.  The average cost of attendance for college ranges from $30K-60K per year with many schools far exceeding the average. For example, the 2022-2023 cost of attendance for Northwestern University was a whopping $89K per year!  

For high income families who will not qualify for need-based aid, you’ll need to take proactive steps to reduce your out-of-pocket costs so that you don’t put your own retirement in jeopardy.  

The Early Days: Embracing Future Planning

Congratulations on your new addition to the family! While it might be hard to imagine your little one as a college student, those 18 years will pass before you know it. Starting to plan now can make a significant difference. 

Initiating a Savings Plan

One of the best steps you can take early on is setting up a 529 college savings plan. These plans are advantageous as they grow tax-free and can be withdrawn tax-free for qualified education expenses. You can start with whatever amount feels manageable and set up automatic monthly contributions. Many states, including Illinois, even offer a state tax deduction for these contributions.  For Illinois residents, we love the Bright Start 529 Plan and if your state doesn’t offer a state tax deduction, we also are big fans of the My 529 College Savings Plan.   See our 529 College Savings Quick Reference Guide here. 

Mid-Childhood: Keeping Pace with Changing Needs

As your child and family grows, your financial circumstances and the costs of higher education may change. It’s a good time to assess your progress and adjust your contributions accordingly. Utilize milestones such as birthdays, Christmas, and other events where your child may receive monetary gifts, and consider directing these into the 529 plan. This not only boosts your savings but also introduces your child to the concept of saving over spending.  If you are unsure of how much you need to be saving, a financial advisor can run some projections for you based on your college funding goals. 

Engaging Your Children in Financial Discussions

It’s also essential to start financial education early. Discuss the value of money, the importance of saving, and setting long-term goals. For example, when my children reached milestones like their First Communion or grammar school graduation, we talked about investing a significant portion of any monetary gifts into their 529 plans or an UTMA (Uniform Transfers to Minors Act) account, highlighting how these early savings could grow and help fund their future education.

Conclusion

Starting your child’s college fund early, taking advantage of tax benefits, and engaging in ongoing financial discussions are pivotal steps in securing their educational future without jeopardizing your financial stability. In our next post, we will explore how to navigate the high school years, from sharpening financial strategies to making smart decisions about college applications and scholarships.

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For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Cogent Strategic Wealth provides investment advice only through individualized interactions. Certain information is based upon third-party data, which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. © 2024, Cogent Strategic Wealth®