Tips to Plan for Your Children’s Education Without Sacrificing Your Financial Goals

Summary: Funding your children’s college education may cause some financial strain, but with the right knowledge, you can feel more confident about your options and secure your long-term financial planning as well.

Planning your children’s education, much like parenting itself, doesn’t exactly come with a playbook. You want to secure their future but ideally without sacrificing your own long-term financial security. With college tuition costs continuing to rise, it’s important to use a smart mix of research and planning to strike the right balance.

The Education Data Initiative reveals that about 64% of parents are actively planning or saving for their children’s college education. And the average amount that families in the United States pay for a private 4-year college degree program hovers around $41,540 per year

On the other hand, student loan debt has a significant impact on the financial security of adult borrowers, especially those over 50. The Consumer Financial Protection Bureau (CFFB) has warned that the number of senior borrowers has grown by 4x in the last decade while average debt per borrower doubled.

Though it’s a considerable expense that can loom large over a constrained family budget, it is possible to save for your children’s education without sacrificing your long-term financial stability.

Your financial stability, your children’s education, or both?

When it comes to financial planning, many parents can find themselves torn between managing their own financial stability and saving for their children’s education, especially as tuition costs increase.

However, it’s important to recognize that these two goals don’t have to be mutually exclusive. With the right knowledge, you can expand your approach to education planning. But being uninformed can cause significant financial strain and may even jeopardize your ability to retire comfortably.

Instead, try to go about your financial planning by:

• Applying smart, well-researched financial planning strategies
• Making informed choices tempered by short-term needs
• Prioritizing long-term goals
• Factoring in current economic reality

Let’s learn how.

Your children’s higher education is an investment

Before you begin, remember that your children’s education is an expensive but important investment in their future.

A college or vocational education can open doors to greater opportunities and higher earning potential for your children for the rest of their lives.

As the cost of college continues to rise, planning ahead is critical to ensure that your children have access to the education they deserve without being burdened by overwhelming student loans. Student loans can be a financial strain on fresh graduates and lead to major financial problems if not repaid on time.

10 effective tips to plan for your children’s education

1. Start planning and saving early

Time is your greatest asset when it comes to saving for your children’s education. The power of compound interest means that the earlier you start saving, the more your money can grow over time.

However, if you were to delay starting to save until your child is ten years old, you would accumulate only a fraction of their tuition by the time they reach college age. By starting early, you give yourself the best chance to reach your savings goals.

2. Use tax-advantaged college saving accounts

Tax-advantaged accounts such as 529 plans, custodial savings accounts and Roth IRAs are powerful tools to help you save for your children’s education more effectively.

Contributions to 529 college savings accounts grow tax-free and can be withdrawn tax-free when used for qualified education expenses.  Since family and friends can contribute to your child’s 529 account, if they have a strong financial situation, consider asking them to contribute as well. For the first few birthdays of your children’s lives, consider asking for small gifts they can unwrap with contributions to your child’s 529. This can be an effective way to save when they are young and the contributions have the most time to grow. As other people contribute to the account, you get to have some wiggle room to allocate more funds to your personal financial goals outside of funding your child’s education.

Consider saving in your retirement accounts such as your Roth IRA. Choosing a Roth IRA over a traditional IRA for educational expenses is typically a preferable route. While both come with the 10% penalty on early withdrawals, with a traditional IRA, you’ll still owe income tax.

If your child gets a scholarship or a good financial aid package, you can keep the money you’ve earmarked for their education and use it for your retirement fund. That’s a good way to make sure the money you’ve set aside is useful to you even if your child gets another funding source.

3. Keep it real

When planning for your children’s education, set realistic savings goals based on your financial situation and expected future college tuition costs. Take the time to research current college tuition rates and estimate how much you’ll need to save to cover your children’s education expenses.

Remember that you will probably need to cover more than just your child’s college tuition. There are also expenses for room and board, transportation, and other costs involved.

Understanding the costs and saving early and often are the first steps to pursuing your college saving goals. Allocate your monthly income wisely to honor all your monthly financial commitments.

4. Prioritize needs vs. wants

When planning for your children’s education, it’s important to distinguish between needs and wants to make sound financial decisions.

You want to provide your children with an education that sets them up for a comfortable life, whether that’s putting them through college or a trade school. But to do so, you need to prioritize your financial future too and avoid overspending on non-essential expenses.

Cutting back on unnecessary expenses, prioritizing saving and exploring all types of assistance for your children’s education is crucial for effective financial planning. This can help keep you on course to meet your saving goals.

5. Explore scholarships and financial aid

Scholarships and financial aid can significantly reduce the cost of education for your children. Before tapping into your retirement accounts or considering borrowing against your home, it’s crucial to explore all available government funding options.

Federal and state funding:

Every year, approximately $3 billion in federal aid goes unclaimed due to students either being unaware of its availability or encountering difficulties in completing the application process. There are several recent initiatives aimed at helping families complete the Free Application for Federal Student Aid (FAFSA), which opens the door to various forms of assistance.

The Department of Education disburses over $150 billion annually to more than 15 million students through direct subsidized loans, federal Pell grants, federal supplemental educational opportunity grants (FSEOG), and federal work-study aid. If federal aid isn’t an option, it’s advisable to explore state-sponsored scholarship and grant programs, as many require FAFSA submission for eligibility.

Schools and university funding:

Many colleges and universities provide financial aid and scholarships from their own endowment funds. Make sure you inquire about opportunities specific to your child’s field of study by contacting the institutions where they’ve been accepted.

Scholarships:

Apart from individual colleges, private organizations and philanthropic initiatives offer scholarship programs catering to students of various backgrounds. Fortunately, there are numerous scholarships available for trade school students, with platforms like Bold.org offering comprehensive listings.

If you’re initially ineligible for federal aid, there are steps you can take to become eligible. Consult the school’s financial aid office to explore options for gaining or regaining eligibility status. However, if federal or private student loans become necessary, exercise caution due to associated risks such as defaulting on repayment and falling victim to loan scams. Federal loans offer benefits like deferment and forbearance periods and loan forgiveness options, making them preferable to private loans. Before committing to any loan, ensure thorough due diligence and consider seeking advice on repayment options through resources like the Consumer Financial Protection Bureau’s Repay Student Debt tool.

By maximizing all available resources and carefully evaluating your options, you can navigate the complexities of financing education while minimizing financial strain and maximizing opportunities for success.

6. Consider community college or trade school

While a traditional four-year college degree may be the right choice for some students, it’s not the only path to a successful career. Help your children to explore alternative education paths, such as community college, trade school or online courses.

Community college and trade school programs often offer more affordable tuition rates than traditional four-year universities. For two-year community college options, students could pay as low as $8,220 in total or $2,015 per semester.

Many trade school programs can lead to rewarding careers in fields such as healthcare, technology and skilled professions.

Exploring these alternative education tracks can help reduce the overall cost of your children’s education, and ultimately how much you need to save for it. This way, you are not overwhelmed if your child chooses a different path and you can divert the extra money into your retirement account or other financial goal.

7. Involve your children in the process

Teaching your children about financial planning and involving them in the process of saving for their education can have numerous benefits.

Usually, children who have regular conversations with their parents about money tend to exhibit positive financial behaviors later in life.

So, include your children in discussions about college savings goals, budgeting and investment strategies.

Let your kids know they can seek other funding alternatives. If they find part-time jobs, work study or scholarship opportunities, that can help support college contributions and allow you to save towards other financial goals.

8. Make prudent investment decisions

If you’re considering investing in stocks, bonds or other assets to help fund your children’s education, it’s essential to do your research and seek professional advice where possible.

The potential average annual return for a balanced portfolio of stocks and bonds can be significant — around 7%. However, you need to keep in mind that investment returns can vary depending on market conditions, asset allocation and other factors. All investing involves some risk, including possible loss of principal.

Consider your risk appetite, time horizon and investment objectives when selecting investments for your college savings portfolio. Review and rebalance your portfolio as needed to stay on track towards your goals.

9. Consider part-time work or internships

Encouraging your children to explore part-time work, work-study or internships during their college years can help them gain valuable work experience and offset education expenses.

Part-time work not only provides students with a source of income but also helps them develop essential skills such as time management, money management, effective workplace communication and problem-solving.

Internships can provide valuable hands-on experience in a chosen field and may lead to future job opportunities after graduation.

Work study is a federal program that provides part-time employment opportunities on campus for students with financial need. Be sure to check with your children’s schools of interest to see if they offer this program. The funding from this program goes towards your children’s education expenses and saves you some money.

10. Reevaluate your plan regularly

Life circumstances can change quickly, so it’s essential to regularly review and reassess your college savings plan as needed.

Monitor your progress towards your savings goals and make changes to your strategy as necessary to stay on track. If you regularly reassess your financial situation, update your savings goals and make adjustments to your investment strategy, you can ensure that you’re adequately prepared to cover the cost of your children’s education while still achieving your long-term financial goals.

If you’re unsure about how to effectively plan for your children’s education while balancing your financial goals, consider seeking professional financial advice. A financial professional can tailor a personalized savings plan based on your unique financial situation, risk tolerance and long-term goals. They may also offer valuable insights and recommendations for optimizing your investment strategy, maximizing tax benefits, and navigating complex financial decisions.

Help secure your children’s education without sacrificing your financial goals

Financial planning for your children’s education without sacrificing your financial goals requires strategic planning and a commitment to financial discipline.

When you start early and follow through with other proactive measures, you can effectively prepare for your children’s future while maintaining your own financial stability. If you need any help planning your financial future, don’t hesitate to contact us for guidance. We are always happy to help.

FAQs on planning for your children’s education

Q1. Can I use my employer-sponsored plan (401k) to pay for my children’s education?

While it’s possible to withdraw funds from retirement accounts such as IRAs or 401(k)s to cover education expenses, it’s not recommended. Withdrawals from these accounts are often subject to income taxes and may incur early withdrawal penalties if taken before age 59 ½. There’s also the other concern of not being able to secure loans if you go ahead and withdraw money for tuition from this account.

Q2. What if I haven’t started saving for my children’s education yet? Is it too late to start?

It’s best to start saving for your children’s education as early as possible, but if you haven’t, start as soon as you realize the need for it. The simple act of opening a savings account can also make a difference to a future college fund.

Even if your children are already nearing college age, there are steps you can take to fund their education, such as researching scholarship opportunities, grants and financial aid. Your child and you can even alternative education paths that may offer lower tuition costs, such as community college, trade schools or online programs.

Q3. How much should I aim to save for my children’s education?

The amount you should aim to save for your children’s education depends on various factors, including the cost of tuition, room and board, and other expenses, as well as your financial situation and goals. Start by researching current college costs and estimate how much you’ll need to cover your children’s education expenses.

Q4. Should I prioritize saving for my children’s education over saving for my own retirement?

While funding your children’s education is important, it’s equally important to prioritize saving for your own retirement. Unlike education expenses, there are no scholarships or financial aid options available to cover retirement costs. By prioritizing your retirement savings, you can help ensure that you have a secure financial future and avoid relying on your children for financial support in your later years.

Q5. How can I ensure that my children’s education savings are protected in case of unforeseen circumstances?

To help ensure that your children’s education savings are protected in case of unforeseen circumstances, consider investing in a diversified portfolio that includes a mix of stocks, bonds and other assets.

Diversification can help mitigate risk and protect your savings against market fluctuations. However, using a diversification methodology does not guarantee greater returns or against the risk of loss in declining market.  In addition, consider purchasing insurance policies, such as life insurance or disability insurance to provide some financial protection for your family in the event of illness, injury or death.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.