EarlyBird Monthly Webinar Series: Best Ways to Save for College

For the second installment of EarlyBird’s Monthly Webinar Series, CEO Jordan Wexler went through many of the ins and outs of saving for college. 

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College can be a stressful topic for parents and families in general, from choosing the best programs and applying, getting in, and ultimately the expenses associated with it and paying for those. College is a major expense and saving and preparing for it is something that most parents would love to be able to play a major role in. This webinar examined the actual costs of college, the various types of vehicles you can use to help save, and concluded with general helpful tips. Let’s dive in!

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The Context of College

We’ll begin by going over some statistics, and being real about the challenges involved in paying for college expenses. Studies have shown that 71% of parents feel nervous about this topic, which is understandable and natural. Education about saving and paying for college can be a powerful tool to combat this anxiety, as well as having conversations with other families who share the same feelings. 

To that end, no conversation about saving for college can happen without discussing student debt - one of the main challenges facing most college-goers and their families. Currently, Americans have more than 1.75 trillion dollars of student debt, with an average of $28,950 per borrower. Rather than burden college-goers with significant debt to dig out of, let’s work to provide a strong financial foundation. 

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The Variables

Let’s go over some of the many topics to consider when building a saving plan for college.

Choosing the right institution:

• Public, private, in-state, out-of-state, etc. There are many options, which gives each college-goer the opportunity to make a savvy educational and financial decision. Public, in-state colleges cost an average of about $22,000 per year. Comparatively, private schools cost, on average, $50,000 per year. Beyond the programs offered, the sticker price is an important factor to consider when choosing a school and starting to save. 

Looking outside traditional options:

• Regardless of whether it’s public or private, four-year college may not be the best option for everyone. Trade schools and similar programs are booming right now, and there are even short-term “boot camps” to develop highly marketable skills like engineering. 

Budgeting based on the expected price in the future:

• The financial burden on students and families is projected to continue to increase, which means the amount families save for college needs to increase. As with any kind of budgeting and saving, the most important question to ask yourself is: how much money am I bringing in, and what are my expenses? The leftover money is free to dedicate any way you choose, including saving for college. Use this calculator to see how much you should save.

Setting aside the largest amount possible:

• The more you save and invest for college when you start out, the more you will have when the time to pay comes! The target number for saving each month is around $875. This is a huge number, and not feasible for many families, but it does a good job illustrating the size of the college expense. Sticking to an aggressive, but responsible, saving and investing strategy will ensure the largest returns.  One key point here is the more money you put in earlier on the the longer time period those funds have to take advantage of compounding interest.   Remember the lessons on compounding interest and dollar cost averaging from last month’s webinar!

Explore the many financial support options:

• Loans, grants, scholarships, and more! These will vary depending on your state, the institution, and your financial status. While the ultimate goal is to take on as little debt as possible to pay for college, more than 50% of students take on at least a little. Knowing the right loan for your situation will help set you and your student up for success in paying it off.

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Find the Best Account For You: 529s vs. Custodial Investment Accounts

The two main types of investment accounts for families saving for a child’s future are custodial investment accounts and 529 plans. Out of the two, 529 plans are generally more associated with saving for college because 529 plans, while fully tax exempt, are meant to be used for qualified educational expenses. If the funds are not used in this way, a 10% penalty will be applied.

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529 Plans

Let’s not gloss over the fact that 529 accounts are fully tax exempt! That means that ALL the ALL the earnings are tax exempt when applied to the student’s college expenses, including tuition, room and board, books, and more. Another great aspect about a 529 account is that it can be transferred to a different beneficiary if the original beneficiary does not want to use the money for educational expenses. Learn more about the differences between 529 plans.

529 plans differ from state to state, so your location is an important factor. Each state has a large financial institution, like Fidelity or BlackRock, that sponsors its 529 program. Different locations offer different benefits, features, capabilities, and investment models. If you can’t tell, research into the many plans available to you is critical, so you can find the best plan for your family. 

An awesome tool that we encourage folks to use is savingforcollege.com, where you can compare different plans side by side!

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Custodial Investment Accounts

The type of account that you create through EarlyBird is a custodial investment account. These accounts also offer tax benefits, but are much more flexible in terms of what the funds can be applied to when they are liquidated by the beneficiary. It can, of course, go towards educational expenses. But it can also help set up the beneficiary to buy a house, start a business, or travel. There’s no way to know what the right path for your child will be, so it can be strategic to set up both kinds of accounts and balance investments between the two. 

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The Bottom Line

As with everything else covered here, thinking strategically and realistically about the best option for your family is more important than anything else - and then doing research to ensure you execute your saving plan in the best way possible. Your children are a part of this process, too, and we encourage anyone at the start or in the midst of saving to discuss it with them. Ultimately, they will be the ones using the funds for educational or other purposes. Including your children early and honestly in the conversation will help to foster their agency and build their understanding of the planning and saving process. When the time comes to make an informed decision on their future, you will both feel confident in their ability to be an integral partner. 

Saving for college isn’t about tomorrow, and it isn’t about next year. This is about setting the child in your life up for the best possible future, with a strong financial foundation. EarlyBird can be your resource and partner throughout the process, and we hope to foster a community of parents and families that can also offer support and guidance.