For the 2017/2018 college year, the average annual cost of attendance (known as the COA) at a four-year public college for in-state students is $25,290, the average cost at a four-year public college for out-of-state students is $40,940, and the average cost at a four-year private college is $50,900. The COA figure includes tuition and fees, room and board, books and supplies, transportation, and personal expenses. Many private colleges cost substantially more. (Source: The College Board’s 2017 Trends in College Pricing Report.)

College savings options

It is important for parents to start putting money aside for college as early as possible. But where should you put your money? There are many possibilities, each with varied features. For example, some options offer tax advantages, some are more costly to establish, some charge management fees, some require parental income to be below a certain level, and some impose penalties if the money is not used for college.

Following is a list of options:

  • 529 savings plans
  • 529 prepaid tuition plans
  • Coverdell education savings accounts
  • Custodial accounts (UTMA/UGMA)
  • Mutual funds/brokerage account
  • Certificates of deposit (CDs)
  • S. savings bonds
  • Traditional IRAs and Roth IRAs
  • Employer-sponsored retirement plans
  • Employee stock purchase plans
  • Cash value life insurance
  • Tax-deferred annuities
  • Options unique to business owners

Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.

Discussing a college funding plan with your child

As college expenses continue to rise relative to the means of the average family to pay such costs in full, parents may find it helpful to sit down with their older children and discuss ways to pay for college. For example, parents may want to discuss:

  • Whether they intend to fund 100 percent of college costs or whether they expect their child to contribute and, if so, in what amount. For example, parents might convey their expectation that their child contribute a certain percentage of all earnings from a part-time job or a portion of all gifts.
  • Whether the child will play a role in the savings strategy. For example, parents who want to gift appreciated stock to their child should convey their expectation that the child will apply all of the gains to college costs.
  • Whether any money will need to be borrowed, and if so, how much and in whose name the loan(s) will be obtained. The amount that needs to be borrowed may affect the type of college the child applies to (e.g., public or private, top tier or middle tier).
  • Whether there will need to be shared financial responsibility during the college years. For example, the child may need to participate in a work-study program or obtain outside work during the college years.

Communicating these expectations ahead of time can prevent unpleasant surprises and help parents and their children better plan for the expenses that lie ahead. Also, an open discussion can give children an increased awareness of the financial burden their parents may be undertaking on their behalf.

Dilemma of saving for college and retirement

For many parents, especially those who started families in their 30s and 40s, the problem of saving for college and retirement at the same time is a nagging reality. Most financial planning professionals recommend saving for both at the same time. The reason is that parents typically can’t afford to delay saving for their retirement until the college years are over, because doing so would mean missing out on years of tax-deferred growth and, possibly, employer-matching 401(k) plan contributions.

The key to saving for both is for parents to tailor their monthly investment to the particular investment goal — college or retirement. Parents will then need to determine their time frames and liquidity needs for each goal, which may require the assistance of a financial planning professional.