How Do I Save for College?

Congratulations to the Class of 2020!

Lots of seniors have just graduated high school or are about to. Parents are doing their best to help their kids make the transition toward adult independence, and a college education seems like a real necessity these days. 

These recent graduates must be thinking about all the exciting things they will get to experience at college. They are surely thinking of all the new things they will learn. They are likely wondering what their first job out of college will be. It may be their first real bout of independence. 

Who is thinking about paying for college? Mom and dad are. Depending on the student, they may be as well. I've spoken with both parents and students about college savings and student loans, and I can tell you that student loan debt is a heavy burden for young adults these days. It often leaves both parents and students with feelings of regret.

Parents are many times faced with the reality that they didn't start saving soon enough to fully fund their kiddo's education. They do what they can, and then help their student work out student loans to bridge the gap. Many students just accept that debt is the only way to pay for a good college education.

What if My Kids are Still Young?

Great news! You can start saving for their college education now, depending on your financial progress! If you've been following me for long, you'll know that I recommend you've eliminated all non-mortgage debt and built up your 3-6 month emergency fund before saving for college. So let's assume you've checked those boxes already. 

Estimate the amount of money you will need to pay for college. If your child is 5 years old, think about what college will cost when they are 18 years old. For example, let's say annual tuition is $10,000 at your local public university, and you want to be prepared to provide a four-year degree for your child when the time comes. In today's dollars, you need approximately $40,000.

If you estimate a 5% annual inflation rate, then it will cost you about $80,000 when the time comes. If you open a tax-sheltered 529(b) account and begin saving that money early, it will be a breeze to pay the bill when the time comes.

Too Late! My Kid Will Graduate High School Next Year! What Now?

There's still hope! Take a breath and make sure college is the right next step by talking with your student. Our culture makes it feel like college is a requirement for everyone. This is the same culture that tries to make us believe that debt is good! 

A college degree might be a good decision for your student, depending on what they want to do with their career. But don’t forget to consider trade schools, community colleges, apprenticeships, and entrepreneurship to help your student get the job they want. It’s hard to beat the price difference. For example, a typical two-year community college degree costs about half as much per year as an in-state four-year college—and about one-ninth as much per year as a private four-year university!

If you decide college is the right next step, take the time to think about return on investment. For example, does it make sense to pay over $100,000 for an education that will land you a job paying $50,000 per year? That’s questionable. Your education should help you earn a premium income. Let's flip the equation. Does it make sense to pay $50,000 for an education that will land you a job paying $100,000 per year? Now, we're getting closer to an equation that makes sense. 

You must have this conversation with your student! I can't remember how many people I've spoken with who have more student debt than they can afford. And it's not unusual for that debt to be linked to degrees that they aren't even using for their jobs! Think about your college degree as an investment in yourself or your student. When will it pay you back?

I Have Tons of Student Debt! What Do I Do?

This is a conversation I've had many times. How do you eat an elephant? One bite at a time. When thinking about eliminating debt, I like to use the debt snowball.

Most students end up with multiple loans at the end of their college experience. If you haven't consolidated your student loans, take the smallest one, and work hard to eliminate it while paying the minimum payment on the others. Once you get it paid off, then take the entire amount you were paying on the lowest one, and add that to the next larger one - and crush it as soon as possible, again, while paying minimum payments on the others. Keep doing that until they are all gone!

There Is Hope!

Regardless of where you are on your financial journey, there is hope! Don’t give up and assume that things will always be the way they always have been. You can choose to make a change - to do things differently. Your children can graduate college debt-free, even if you didn’t. You can be the one in your family tree to change the legacy for generations to come. Let’s talk!