Saving for College

There is more to saving for college than putting away a certain amount in a 529 plan, UTMA, UGMA, prepaid tuition, or other such accounts. Many families underestimate the impact of the cost of a college education. It’s not just about the books, tuition, and room & board, but the hidden opportunity costs that extend beyond the time at school. The effects are felt for a lifetime.

Once we understand opportunity costs, we realize the actual cost of an education goes far beyond tuition, housing and books! We’ll show how to tell the truth about the cost of college. When you understand the rules of the game, you can play to win!

Most parents of a college bound student find themselves vastly unprepared both emotionally and financially for the day their student goes off to college. While the college expense is usually more than what is anticipated, with proper planning, no matter how late in the game, there are steps that can be taken to ensure the most efficient and effective college plan is in place. In order to properly prepare financially, it is important to understand the true cost of college BEFORE the first invoice arrives.

Successful college funding requires proper planning and strategies. Without proper education and planning expertise, you may wind up solving one problem and causing another.

Nationally, tuition rates are increasing by approximately 6.5% per year on average. That’s nearly double the rate of inflation. Without proper planning, most college funds won’t keep pace with the ever-increasing costs. When traditional college funds fall short, you may wind up sacrificing other areas of your financial plan in order to solve this dilemma.

It is important to understand that the cost of a college education is the sum of components beyond just tuition. In order to understand the TOTAL COST OF ATTENDANCE, it is important to include tuition, room and board, books, transportation, fees, and other miscellaneous costs including spending money (for laundry, personal hygiene products, etc).

Just like any major expense in life, the only successful way to manage the expense is through proper planning. In the case of college, it is critical to understand the true cost of attendance, factoring in how long it will probably take, annual increases in costs, and the likely availability of financial aid.

Since paying for college is usually not the only financial goal that a family has, it is essential to consider all other financial goals and in particular the opportunity costs associated with college.

Understanding the concept of opportunity cost allows us to calculate the total impact to retirement savings assuming an interest rate associated with opportunity cost. (That would be the assumed interest your college expenses could have earned if they were invested for retirement).

It is not unusual that the total lost opportunity at retirement is nearly $1 million dollars per child attending college.

Without proper guidance and education, most parents of college bound students will follow this path when paying for college. First, they will spend what they’ve saved specifically for college. Next, they will begin seeking borrowing opportunities and often discover house equity or retirement funds to be the most obvious and available sources. Third, a family considers adding part time work, starting a side business or other forms of added income. Finally, when all hope is lost, a family may consider applying for financial aid to determine what financial aid opportunities are available.

While this approach may result in a fully funded college expense, it may also put into jeopardy a successful retirement, house ownership, financial stability and other financial goals a family may have.

There are many elements to consider in determining the cost of college, the total out-of-pocket expense, as well as the impact it may have on your other financial goals and dreams. Unless you are certain of each of these elements, you may be making decisions that are not in the best interests of your financial health.

It is impossible to plan effectively for anything when we are unaware of the rules and strategies available. Only when you are aware of the total cost and your capacity to fund college without impairing your ability to attain your other financial goals such as retirement, will you be able to determine the proper plan for funding college.