Funding college is among the most significant–and expensive–decisions families face. Even for families with plenty of money, it’s one of the largest investments they will make. The role of financial planning is to create a thoughtful path to save for and fund the ideal college selection you want for your kids or grandkids.
Here are the 4 observations we want to share from several decades of helping families plan for this decision.
1. The #1 Piece of Advice
One of the biggest challenges we see is that parents procrastinate the planning process. Life is busy and expensive through all seasons of parenting, and while it’s easy to put it off for another day, a shorter runway usually leads to fewer options. We’ve met many families (even ones with very high incomes) who are considering tapping into retirement savings, taking on excessive debt, or disrupting other financial goals.
The best thing you can do for your family is to start early. It’s true for two reasons.
The first is that time in the market is your greatest ally. By starting your investing early, you give the power of compounding more opportunity to put your wealth to work for you.
The second is that a longer planning runway keeps you more aware of the shifting landscape. We all know college costs have continued to climb, and it’s hard to imagine a drastic deviation from that trend. The planning process is continuous, and it can help prevent your plan from drifting off course.
2. Set Clear Expectations Early
We also talk to our clients about managing expectations—both their own and their children’s. It’s not uncommon for parents to save for years, assuming their child will attend one school, only to have them change their mind at the last minute. Maybe they get into an out-of-state university with a higher price tag. Maybe they decide on medical school, which adds years of additional tuition.
Open conversations around costs, funding, and the expected value of degree paths can lead to fewer financial surprises down the road.
3. 529 Plans and Other Strategies*
There are many different ways to save for education, and not all strategies are created equal. We often discuss 529 plans with clients because of their tax advantages. Money in a 529 plan grows tax-free, and as long as it's used for qualified education expenses, withdrawals are also tax-free.
There’s also a new rule many families don’t know about–if you have unused funds after your family’s college expenses are done, you have a powerful new option. You can roll up to $35,000 from a 529 into a Roth IRA for your child. That early investment will have 30-50 years to grow until their retirement year, an incredible head start for their own financial independence.
Any additional excess funds can be held in the 529 as an additional head start for future generations. Think of it conceptually like a family education fund with a generational head start!
4. Find Your Financial Balance
One of the things we emphasize is balance. Parents often want to give their children the best opportunities, but it’s essential to do so without compromising their financial well-being.
Our primary goal in planning for education is successfully funding their preferred education in a way that doesn’t come at the expense of their long-term financial freedom. Whether it’s helping them decide how much to contribute to college versus their retirement, structuring withdrawals in the most tax-efficient way, or navigating cash flow for other goals (like weddings), we want to prioritize the health of the complete financial plan.
The Bottom Line
We don’t tell people where their kids should go to school—that’s their decision. Our job is to help you plan for what will be needed and maximize your options. By taking a planning-first approach, managing expectations, and using the right savings strategies, families can set up the next generation for the goal of success—without sacrificing their own financial future in the process.
The sooner you plan, the better positioned you’ll be when the tuition bills start coming in.
Disclosures:
*Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
Securities and advisory services offered through LPL Financial, a registered investment advisor,
Member FINRA/SIPC.