Education Planning: How It Works and What to Consider

For many parents, seeing their children attend and graduate from college is a lifelong dream. However, with the average annual cost of college reaching $38,270, according to the Education Data Initiative, this dream can seem like a tall task. That’s why it’s essential to start planning for education-related costs early, ensuring you’re prepared when the time comes.

Planning can feel overwhelming, especially when balancing education savings with other financial goals, such as retirement. In this article, we’ll walk you through the education planning process, including how to estimate costs and explore different saving strategies. You’ll also discover how a financial advisor can help tailor a plan to meet your needs and goals.

Why Education Planning Is Important

The unfortunate reality is that college is very expensive, and without proper financial planning, young adults can face hundreds of thousands of dollars in student loan debt. That’s why it’s imperative to plan for your child’s education, whether they’re a newborn or nearing high school.

The cost of a college education goes beyond just tuition. One can reasonably expect the following costs to be included each year:

• Textbooks
• Housing
• Food
• Transportation

Education planning helps you gradually prepare for these expenses by setting aside savings over several years. Much like retirement planning, this approach often allows you to contribute to dedicated accounts, such as 529 plans or Coverdell ESAs, where you can invest and grow your funds.

On average, the cost of college over four years amounts to about $108,584, per the Education Data Initiative, a daunting figure for many families. However, saving even a portion of this amount can help lessen the financial burden on students. Meeting with a financial advisor can help you set realistic goals and develop a savings plan that aligns with your financial situation.

How Education Planning Works

Education planning involves developing a multi-year strategy to help pay for school tuition and other associated costs. Normally, it applies to preparing to afford a child’s college, but can also be for other expenses, such as private school. Typically, with the help of a professional, you’ll map out the estimated cost of the goal, then save and invest incrementally over a specific period.

At the start of the education planning process, you’ll need to determine, or at least estimate to the best of your ability, how much everything will cost. Jonathan Sparling, AFC, CCFC, a director at CollegeWell (sponsor of the Private College 529 Plan), recommends that families “use Net Price Calculators available on all college websites to get a personalized estimate of their families’ costs.” This will “provide an estimated award based on the college’s financial aid awarding policies,” he says.

Once you have your goal in mind, the next step is to decide which savings vehicle(s) to contribute to regularly. There are many different ones to choose from, including the following:

• 529 plan. This is a tax-advantaged savings account meant specifically for educational expenses. Multiple people can contribute to it and you’ll be able to invest in a limited set of securities to grow the principal, such as mutual funds and exchange-traded funds (ETFs).
• Coverdell ESA. This is a trust you can set up to pay for qualified education expenses, such as college tuition and secondary school. The beneficiary must be younger than 18 when you open the account. Like a 529 plan, you can invest in securities to grow funds in it.
• UGMA/UTMA. This is an account that allows you to gift a beneficiary money directly. You can invest and grow the deposits over time. Once a child becomes an adult, they can use the funds for whatever purpose they choose.
• Roth IRA. While this is a retirement account, you can use it as a means to save and invest for college. If the account has been open for at least five years, you may make tax-free withdrawals to pay for qualified education expenses.
• Certificate of deposit (CD). These allow you to save sums of cash at a fixed interest rate for specific periods (you may not withdraw funds until the time is up). If you’re nearing your goal, these could be an effective short-term investment.

For more on the savings instruments above and how they work, we recommend visiting our article on how to save and invest for college. In it, you’ll also find the key differences between each option to help further your understanding.

Finally, with help from a financial advisor, you must figure out how much you want to save each month (or year). Susan Einberger, CFP^®, EA, MBA, a Certified Member of the Alliance of Comprehensive Planners (ACP) and owner of Enjoy the Ride: Financial + Life Planning in Boulder, CO, explains her thoughts on what to consider as you begin saving for education:

The most effective way to save for higher education is to start when the child is born and to automate direct deposits from your paycheck. Starting when the child is born gives more time to save and more time for investment growth. Also, “paying yourself” first is key to reliably building savings, otherwise most people will spend their take-home pay and have nothing left over to save. Projecting the cost of college with inflation can make saving enough feel daunting, but it’s important to save what you can. In addition to using the Child Tax Credit strategy, saving another $100/month/child for 17 years can result in $20,400 (without any investment growth). The two strategies combined yield at least $54,400/child at high school graduation.

What to Know About Investing for College

Once you have a clear plan in place, choosing the right investment strategy can help bring you closer to your education savings goals. For many, college is several years away, giving them time to select a long-term mix of securities. However, others may require short-term instruments, such as CDs or fixed-income securities.

Sparling explains that “the optimal investment strategy” for those with “younger children” is “typically a portfolio weighted more heavily in equities versus bonds.” However, “as children get older, moving funds into a more conservative asset allocation may be best, especially as clients get closer to drawing funds,” he points out.

While the above may seem pretty straightforward, it’s still a good idea to consult with a financial advisor. They can help you figure out which asset allocation is optimal to get you closer to your goal.

How Scholarships and Financial Aid Factor In

Financial aid is a crucial consideration as you plan for your children’s education. While some families may be able to cover the entire cost of college, many will not. In this case, it’s especially important to consider how much student loans and scholarships will cover.

As your child enters high school, they may be able to receive scholarships based on their academic accomplishments, athletic participation, community service, and more. Some scholarships can be worth thousands of dollars, taking some of the financial burden off of families. You and your child can search for opportunities to apply for either via a high school counselor or a search tool, such as the one offered by the College Board.

As a last resort, another option is to seek financial aid. Your student can fill out the Free Application for Student Aid (FAFSA) and see what loans they qualify for. Be aware that family income, net worth (including funds in UGMA/UTMA accounts), and scholarships can impact eligibility. However, households earning under $250,000 per year will qualify for at least some aid.

Balancing Education Planning with Other Financial Goals

Education planning is important; but you may also want to consider how to balance it with other long-term financial goals, such as retirement. For many families, it may seem challenging to allocate funds to college when there are other priorities to handle. Careful planning, however, can help you figure out how to contribute what you can regularly.

No matter the goals you have, managing your cash flow and establishing a budget are two ways to ensure your money is going where you want it. Your financial advisor can identify how much you can afford to allot to long-term goals, such as retirement or college. In some cases, it may make sense to set up monthly contributions to dedicated savings accounts, making it easier to stay on track.

Over time, your income and other life circumstances might change. That’s why it’s wise to constantly re-evaluate your plan to ensure you’re on the right path. For instance, you may find that you have more money you can use to plan for education expenses than before. Conversely, you may have to pull back on what you’re contributing if you lose your job or take a pay cut.

How a Financial Advisor Can Help

When you’re planning for long-term goals, the value of a financial advisor is immense. This is especially true if you find yourself not knowing where to start. They can answer your questions, devise a comprehensive plan, and work with you to take immediate action.

A professional can offer tailored strategies and adjust your plan as needed. If you need help finding a qualified expert near you, we recommend using this free matching tool. After filling out a short quiz about your current situation and goals, it’ll present you with a vetted option that aligns with your needs.

Frequently Asked Questions

When should families start planning for college?

According to Jonathan Sparling, AFC, CCFC, in an ideal situation, “families will start saving for college early, and most early saves start once their child is born.” He adds that it’s key to remember that “unlike retirement, the runway for college is much shorter.” Ultimately, however, you should begin planning whenever you’re able. Even small contributions at the beginning can make a difference later on.

Is a 529 plan the best investment option to save for college?

529 plans are an excellent option to save and invest for college. They offer tax advantages and allow you to grow funds with compound interest and investment returns. Despite this, you should be aware that the cash it holds can only go toward qualified education expenses (all other withdrawals incur a 10% penalty).

If you have an only child and don’t think they’ll go to college, it can get complex. When a 529 has been open for more than 15 years, you can roll funds over to a Roth IRA for your child. For parents with several children, you can always opt to change the beneficiary.

Can other people contribute to my child’s college account?

Depending on the account, other people can contribute to your child’s college fund. 529 plans, Coverdell ESAs, and UGMA/UTMAs all allow multiple individuals to contribute to them.