Investing for Your Child's Education

As many of you are aware, the cost of college is rising, so it's important to start saving early for your child's education. Easy enough, right? Well…

The cost of college is rising faster than inflation. Some rough numbers:

• The College Board's Trends in College Pricing report, which shows that the average cost of tuition and fees at a four-year public college has increased by 213% since 1980, while the Consumer Price Index (CPI) has increased by 55% over the same period.

Which means your other expenses are taking a larger cut leaving less to devote to education. So where do you start? And what type of investment is right for you?

In this blog post, we will discuss the basics, the little things when it comes to investing for your child's education. We'll cover topics such as:

• How to start investing and how much to save
• Different types of investment options
• How to choose the right investment for your child's age and goals
• What the role of a Financial Advisor is in Education Planning

So where do we even start?

1. Start Early

The same concept applies to paying off debt, savings for retirement, or anything other large future purchases. The earlier you start saving, the more time your money has to grow. Even if you can only save a small amount each month, it will add up over time.

2. Consider the Cost of Education

The cost of college is rising. According to the College Board, the average cost of tuition and fees at a four-year public college was almost $10,000 for in-state students and over $25,000 for out-of-state students in the 2020-2021 school year. The average cost of tuition and fees at a four-year private college was about $38,000.

This means that making progress early, giving those investments time to grow, and checking in with your children on what career they would like to pursue becomes increasingly important. Keep in mind that undergraduate degrees may not be the only thing your child is seeking, especially if they are headed into the medicine, law, or another field that requires post-graduate education.

The good news is that there are other opportunities to consider with regard to your children’s education:

• Scholarships and grants. There are many scholarships and grants available for students. Do some research to see if your child is eligible for any of these awards, even if they are state specific.
• Work-study programs. Many colleges and universities offer work-study programs. These programs allow students to earn money to help pay for their education.

These are great tools to utilize, especially if additional funds are needed to pay for school. Remember, there are a number of ways that you can pay for college. Don’t be afraid to explore your options.

A word of warning. Student Loans. Be VERY careful with student loans. Know the terms and weigh pros and cons before signing up. Your advisor is a great resource for you to “crunch the numbers” or if you have specific questions.

3. How much should you consider contributing based on education costs?

This is the question, isn’t it? The answer really comes down to several factors. The amount you should contribute to a college savings account will depend on your child's education goals and your financial situation. I tell people that a good starting place is to aim to save around $2,100 per year per child. This comes down to about $175 per month. Keep in mind that this is a starting place. If you child’s goals require additional schooling (Post graduate degrees, etc…), you may consider saving more.

What are your other options?

529 Plans – One of the most popular options when it comes to education savings.

• 529 plans offer a great tax-advantaged way to save for your child's education. With a 529 plan, you can save money for your child's education and give others the opportunity to contribute as well. One of the best features of a 529 plan is the eligibility for anyone to contribute to the plan. In addition to helping fund your child’s education, these contributions are made as gifts, which can help reduce estate taxes.

• The IRS has recently updated the rules for rollover features of the 529 plans. These changes allow account holders to transfer funds from one 529 plan to another without having to pay taxes on the earnings. This can be a helpful way to consolidate funds or to take advantage of a better investment option.
• Additionally, With SECURE 2.0, Starting in 2024, 529 plans that have been opened for 15 years may be rolled over into a Roth IRA for the beneficiary. This is a great way to start your children off on a the right foot for retirement or other major expenses.

• Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement, and should be read carefully before investing.

There are a variety of other investment options available for saving for your child's education and future. Some popular options include Coverdell Education Savings Accounts, and UTMA accounts.

• Coverdell Education Savings Accounts (ESAs): These plans offer tax-advantaged growth and are available to children under the age of 18.
• UTMA accounts: These accounts are not tax-advantaged, but they offer flexibility in terms of how the money can be used.

Depending on your child’s age and future plans, you may want to consider having multiple accounts to allow for greater flexibility. Some allow multiple donors; some have lower contribution limits. Your financial advisor can help you figure out which one works best for you!

Employer Sponsored 529 Plans – Although these are less common, more employers are adding these to employee benefit plans. It is definitely worth a conversation!

How do Financial Advisors help you prepare for the financial burden of education costs?

A financial advisor can help you develop a plan to save for your child's education, choose the right investment options for your goals, and monitor and review your plan regularly.

Here are some specific ways a financial advisor can help you plan for your child's education:

• Develop your plan and help you stay on track. Financial advisors are a great resource for you, especially if you are looking for a starting place. We can help you create a plan to follow from day 1. We also keep you on track with your savings goals and evaluate whether or not to make adjustments. Meeting regularly with your advisor can help you feel more comfortable with your plans and get much needed answers to your questions.
• Help you choose the right investment. A financial advisor can help you choose the right investment for your child's education. They can consider your child's goals – What type of education does your child want? What are their career goals? It is also important to keep in mind that some of these savings can be used towards primary or secondary education as well, so your time horizon and risk tolerance is super important.
• Weigh the cost/benefit of different investments.
• Analyze the rising cost of education.
• Customized planning for you.
• Review your plan regularly. As your child gets older and closer to college, you'll review your investment plan with your advisor and begin having conversations about how and when to distribute those investments.

If you are a parent who is concerned about the financial burden of college, I encourage you to reach out to a financial advisor. We are here to help develop a plan to save for your child's college education and get the most out of the financial aid available.

Any opinions are those of Gil Brandon and not necessarily those of Raymond James.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.