Paying For Your Child's College Education
When you hear the graduation march, “Pomp and Circumstance,” does it bring you back to your own high school graduation? Perhaps you recall processing down the aisle, proudly wearing your cap and gown, searching the crowd for your mom or dad. Maybe you remember the line of classmates leading out to the football field or auditorium and listening to a boring speech or two. Possibly you had some fun blowing bubbles or putting hula hoops around your principal as he handed you a diploma. Everything changed after that day. Time passed, and now you have kids of your own. Whether your child is 16 months or 16 years old, you may be wondering how to fund their college education. Will you be ready when he or she gets ready to graduate?
How Much Will College Cost?
The staggering statistics about the cost of raising a child could scare off even the most successful millennial or Gen-X from parenthood, but have no fear; planning will help prepare you to tackle those expenses one way or another. Let’s say you have a newborn and want to cover 100% of the cost of his or her 4-year public in-state college education. Using the College Cost Calculator at savingforcollege.com, we can expect the “sticker price” cost of a 4-year in-state public college in 2039 to be $175,610, assuming an annual 2.5% cost increase. However, this calculator automatically adjusts to the “net price,” reducing those fees by an assumed amount of scholarships and grants. This scholarship and grant number is “the average amount of money a family typically receives in financial assistance” based on income. The net price of $123,423 assumes a household income of $100,000. Assuming a 7% rate of return, you can expect to fully fund your child’s in-state college experience with $285 per month if you start right away. Keep in mind your state may offer you a tax credit for saving within a 529 plan.
To Loan Or Not To Loan
If your child is planning to go to college this year or next and you do not have enough saved to cover the tuition, you may be wondering about the best way to fund that education. Should you take out loans, cover them with your other savings or income, or ask your child to take out a loan? Sallie Mae’s How America Pays for College 2020 report indicated that overall, 57% of college costs are covered by parents. This amount is divided between parents’ income and savings, including 529 plans (44%) and parent loans (13%). Scholarships and grants cover 25% of the cost, while students contribute towards 16% of their college education split equally between student income or savings (8%) and student loans (8%). Relatives cover the remaining 1%.
The burden of student loan debt is currently at the forefront of political discourse. As parents, it is natural to want to protect our children from future debts, and we may feel tempted to take that burden on ourselves. However, the federal student loan rates set by Congress generally favor student borrowers. According to studentaid.gov, an office of the U.S. Department of Education, the interest rates for undergraduate student loans disbursed by July 1, 2021, was 2.75%, while the Parent PLUS loan rate was 5.30%. Our politicians will likely continue to debate ways to make college more affordable, but there is no question that an investment in education will have a high return on investment (ROI).
We will discuss more on ROI in a future post. In the meantime, if you want help modeling out a college savings plan for your child or grandchild, schedule a FIT meeting to determine if it makes sense to work together. College planning is just one of the many services included in our proprietary financial planning process we offer to our clients. We continuously monitor your accounts to make sure you are on track to reaching your goals.
For nearly three decades, the Hurlow Wealth Management Group’s team of CERTIFIED FINANCIAL PLANNERS™ based in Bloomington and Indianapolis, Indiana, have assisted clients all over the country to work through education and other financial planning issues. Our clients tell us that working together helps them find clarity, confidence and feel comfortable knowing that they have the resources to provide for their family. To start your financial plan, schedule a consultation today.