The increasing costs of higher education have made education planning an important aspect of personal financial planning. However, education planning does not always receive the necessary attention required because some parents are counting on scholarships to cover the cost of their children’s education. Others procrastinate, as they do with retirement planning, because the actual expenditure may not be incurred for many years and is a low current priority.
Often, parents have made a mental commitment to certain standard of education for their children, but have done very little planning for the day when the tuition bill arrives. This tendency to postpone the issue may eliminate several education planning strategies that offer opportunities for financial gain when implemented early.
In general, the six basic methods of paying for a child’s higher education include a child working his or her way through school; obtaining financial aid (scholarships and federal loans); paying college expenses out of parents’ current income or assets; using education funds accumulated over time; obtaining private loans; and grandparents (or others) paying college costs.
The first method (child pays) can work, and many successful persons have obtained a good education while working to pay their way. But this often limits the student’s choice of schools and can adversely affect grades. Planning to rely on financial aid (the second method) is risky, and the family may not qualify for enough. The third method (parents paying out of current income or assets) works for some, but many parents will not know if their current income and/or assets will be sufficient until it is too late. In addition, this method is not as tax-efficient as some strategies used to accumulate separate education funds (the fourth method). However, these strategies are not without risks. Poor investment choices could prove costly. The fifth method (private loans) can result in a serious debt burden. Obviously, the sixth method is ideal, but it is not available to many.
In summary, the key to effective education planning is to start planning and saving early to create future options. In addition, the use of tax-sheltered investment and savings vehicles like a 529 plan can help ensure adequate funds are available when a child enters college.