Saving for college has always been a challenge, especially since college costs increase much faster than inflation. Now, parents and students face additional hurdles as they prepare for a college experience that is very different from their plan.
How can parents and students plan to pay for college amid a pandemic? This is a great learning and research opportunity for your children. Discuss the budget for school and how the pandemic may have impacted their options. With fewer activities and less travel, you have more time to explore schools virtually together and discover in detail the types of scholarship or other financial opportunities schools offer.
One could argue that a future filled with uncertainty has always been the norm, and that is why college savers should make sure to have a comfortable financial “buffer.” Avoid stretching finances to the max, taking on excessive debt or forgoing retirement contributions to fund a child’s college expenses.
Just as you categorize schools by safety, target, and reach academically, families should do the same when comparing the schools financially. Financial “safety schools” are those well within your budget, and these are the ones to focus on. Now might be the time to consider more cost-effective options, at least in the short-term. Options might include taking a gap year or applying for a less expensive college for entering freshmen who do not want to pay full price for remote learning.
The most important objective should be to cover your higher education costs without putting your family’s financial well-being in jeopardy. So let’s get down to investing and financial tips.
Save for Your Future, Even When Markets Are Volatile
Volatile markets don’t change the fact that tax-advantaged 529 plans are still one of the most effective ways to save for college. Growth is tax-free when used for qualified expenses, and in some states, contributions are state income tax-deductible. So it is important to keep saving, especially if your children are still young.
If market volatility is making you nervous that you might not have enough to pay for college, it could be a sign that your college fund is invested in too risky a manner. The investment allocation should match the timeline when the money will be needed. Portfolios for younger children’s college funds can “afford” to be more aggressive—that is, they can have a higher stock exposure. Portfolios for high schoolers’ college funds should be increasingly focused on capital preservation, such as a mix of bond funds and cash, which are less volatile.
Be a Value Shopper
If you have a rising high school senior or a current college student, consider the cost of options and the possibility of remote learning. A rising senior can hope for a more traditional start to college, but families must look at what they can afford and be intentional as their senior is applying.
Scholarships, grants and cooperatives can bring the price of some universities into the financial safety zone. During this pandemic, family budgets and incomes have been strained and tested, so the idea of attending a dream school at any cost is not a viable or prudent option.
Prioritize Your Various Financial Goals
Paying for college is a major financial goal, so the earlier parents start saving, the better. However, fitting one more line item into a young family’s budget can be challenging. Parents who would like to fund their children’s college expenses need to make sure they have an emergency fund to cover three to six months of living expenses, and they should be making contributions toward their own retirement accounts.
Your 401(k) should always be your priority, especially if your employer is making matching contributions. However, families can strive to contribute between 10% and 15% to a 401(k) and then set a dollar amount monthly to the 529 plan. The advantage of this strategy is that as your salary increases, your 401(k) contributions increase, and you are consistently saving to a 529 plan. Even if the 529 plan balance is small when college begins, it can still be used to cover some expenses, such as books or part of tuition.
Many parents are tempted to put off their own investment contributions to prioritize the 529 college savings.
Remember, you can always approach college selection from a value and budget perspective, which might include some student loans. But when you retire and are no longer earning income, you can’t borrow, and your only choice is to reduce costs.