Saving smart: strategies for funding your child's education

Figuring out how to save for your child’s education can feel daunting, especially if you’re still paying off your own student loans. For example, post Biden forgiveness, roughly 75% of student loan borrowers say the restarting of loan payment has had a negative impact on their credit card spending habits due to financial strain (Source: US News, 2023). 

Fortunately, it is possible to save for your child’s education and the sooner you start, the easier it’ll be. It’s really not as scary as it sounds and your kids will appreciate your financial foresight when they’re older.

According to US News, the average cost of tuition and fees for the 2023-2024 school year was $10,662 for in-state public colleges and $42,162 for private colleges – and that's not counting room and board or textbooks. 

So maybe the numbers sound a little scary. But with smart planning, and a slow and steady approach to saving, you can provide the gift of options when your child is ready to figure out their education needs. 

Whether they want to go to a private out-of-state school or pursue a trade like landscaping (or something in between), saving for their education will give them the best chance for success.

Here at Plenty, we’ll walk you through how to make that happen, step by step. We'll discuss: 

• Why it’s important to save for your kids' education

• When to start saving

• How much to save

• How to decide which kind of savings account to use 

• How Plenty can help

Why it's important to save for your child's education

As more and more college grads move back home and struggle with jobs, and with new technology like AI, college may very well be less critical down the road. But here’s what the data shows us today (Source: Forbes, Pew Research, 2023): 

• Money. College graduates typically earn 84% more than people who only finished high school. That adds up to $1.2 million more money over their lifetimes, on average. 

  
  

• Benefits. College graduates are also 47% more likely to have health insurance through their employer, and their employers contribute an average of 74% more toward their health coverage. 

  
  

• Longevity. College graduates are 3x less likely to live in poverty. And studies suggest that people who have attended at least some college can expect to live seven years longer than those who didn’t.

Even if a four-year university doesn't end up being a good fit for your child, they may want to go to a trade school to learn practical, hands-on skills they'll need for their chosen career. Trade schools can offer career paths in horticulture, electrical work, plumbing, welding, cosmetology and more.

On average, trade schools cost about $33,000 in total. Although that’s less than one year of private college, it’s still a significant amount of money.

Having a sense of what these costs could look like when your child is ready to leave the nest will help you make sure they’re ready to take flight. And if your kid decides not to go to college, you can always roll the savings over to a sibling or your retirement.

When to start saving for your child’s education

Your education savings account grows over time, so the sooner you start investing in it, the better.

Let's see how this works with a few examples assuming a moderate 5.8% annual rate of return.

Example A - You start saving when your child is 8 years old. You contribute $100 each month for ten years until they turn 18. By their high school graduation, you’ll have saved $21,000.

Example B - You start saving right off the bat as soon as your child is born. If you contribute $100 each month for 18 years, you’ll save $43,000.

Example C - You start out like you did in Example B, saving $100 a month from the time your child is born. However, after the first five years, you raise your savings amount to $300 a month for the next 13 years. By the time your child turns 18, you’ll have saved $115,000. That’s $72,000 more savings than in Example B!

Saving since birth, instead of 8 years later, more than doubles your money before your child is ready to enter college. Now you can see why the earlier you start – even if it’s just a little bit at a time – the better the outcome. 

How much to save for your child’s education

Even if you don’t have kids yet, you may be thinking about all the costs involved with raising a baby. Just how much will college cost 18 years from now? A four-year public school education in 2041 could cost about $264,000 and private schools could cost upwards of $548,000 (Source: Lifetime Financial, 2023). 

As much as we wish those big figures were typos, they’re not. Higher education costs are projected to continue rising. However, before you panic, consider these important points.

• You don't have to pay for 100% of your kid's education. While roughly 85% of parents say they plan to pay for at least some of their kids’ college, on average they cover 45% of the tuition, with the rest coming from other forms of financial aid. If you choose not to cover 100% of the cost or are simply unable to, you can work with your child on piecing together the rest using grants, responsible student loans, and scholarships.

  
  

• Time is on your side. We covered this a little earlier, but it bears repeating: starting early can result in a lot more savings over time. It’s better to contribute whatever you can afford now (even small amounts add up!) and to keep going consistently versus doing nothing for years because you feel you don’t have enough to make a meaningful impact.

  
  

• Family members may be able to help. Talking about money with your parents or other close relatives can be uncomfortable sometimes. But if your parents love to shower your kids with gifts, consider asking them to invest some, or all of that money, toward your child’s education instead. For example, if four grandparents normally contribute $100 for birthdays and holidays, that could be $400 a year into your child’s education fund. Over 18 years, that could grow to $14,000 on top of your own savings. Nice!

Savings account options for your child’s education

Here are some options to consider when you’re ready to set up an education savings fund for your child. These are the most common:

529c: A 529 plan offers tax-advantaged savings in one of two forms: education savings or prepaid tuition. These types of accounts are sponsored by states, state agencies, or educational institutions. 

Most education savings plans are open to everyone, while prepaid tuition plans typically have residency requirements. If you end up saving more than is needed, the extra money can be used for another child or rolled into a Roth IRA for your retirement.

UTMA/UGMA: UTMA stands for Uniform Transfers (or Gifts) to Minors Act. Put simply, UTMAs allow you to save money on behalf of your child, in an account designated for them. The money in an UTMA can't be transferred to anyone else, and your child can't touch it until they turn 18. 

But once they're 18 (or 21 depending on your state), they can use the money on anything they'd like. That might be college or a down payment on a home – but there's the risk they'll spend it on an extravagant trip to Bali. These accounts offer flexibility on how the money is used, but after the account transfers to your child’s name, you will have no control over how your child spends the funds. 

Brokerage account: Some families opt to save for education in a straightforward brokerage account. This gives you more control over how the funds are invested and how the money gets spent. The downsides are the typical tax rules of brokerage accounts and that these assets can negatively impact your child's ability to get financial aid. 

We’ve put together a handy table below to help you compare these three options for education savings.

How can Plenty help?

Plenty has all the tools you need to plan, invest, and track your savings. When you set up a 529c plan for your child’s education, you can connect it to your Plenty account to visualize what your savings growth might look like over time. 

You can also set up and link an individual brokerage account for your child’s education, but remember it won’t be tax advantaged.

We’re also working hard to bring you 529c access directly through the Plenty investment platform. Check back for updates and more great Plenty content to help you achieve your financial goals sooner.

About Plenty

Plenty is a wealth management platform designed specifically for couples. We go beyond budgeting, making it simple to invest, save, and grow toward your future goals by unlocking access to the financial strategies of the wealthy. Ready to get started? Sign up for free today.

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