Preparing for college when a child is young can minimize a lot of financial stress later on.
Aside from buying a home or a new vehicle, putting a child through college is likely to be the largest expense you’ll incur in your lifetime.
And, on top of the expense, is the number of different options available. There are all kinds of different investment strategies and tax-advantaged accounts to choose from.
Plus, how do you plan for the possibility that the child in your life may decide to not attend college at all?
Thankfully, there are a few key things you can do to financially prepare yourself and the children in your lives for any eventuality (including college).
Let's get rolling.
How To Prepare For College in The Early Years
The best way to save for college is to start yesterday. It’s never too early to start saving for a child’s future.
Here are some ways that you can start preparing for college as soon as an important child in your life is born.
1. Take advantage of compound interest
The earlier that you start contributing to a child’s education fund, the less you’ll need to contribute overall.
Starting early makes the process of paying for college easier for both you and the child in your life.
When you invest early, you can take advantage of compound interest. That means your money will start to build upon itself and grow exponentially over time.
Let's break down a couple hypotheticals to illustrate how compound interest works:
Example #1: 18 years of college savings
Imagine that you start saving for college as soon as a child is born.
If you contribute $100 per month for 18 years at a 3% rate of return, you'll have about $28,600 after 18 years.
$21,600 of that will be the principal that you invested, and $7,000 will be interest.
Example #2: 10 years of college savings
How does that differ if you wait until a child is 8 years old to start saving for college?
If you contribute $100 per month for only 10 years at 3%, you’ll end up with a total of $13,900.
$12,000 of that will be the principal, and only $1,900 will be interest.
In the first example, almost 25% of your college savings comes from interest. In the second example, it’s less than 14%.
That’s why it’s important to start early, and make your money work for you.
2. Open a custodial account
A 529 plan is great if you know for sure that the child in your life is going to college. But their future might have something else in store for them.
A custodial account is a more flexible way to invest in their financial future, and let them decide what they want to do with the money.
How we view education is changing drastically. More people than ever are opting out of going to college. Instead, many are taking online courses or starting their own businesses.
It’s difficult to predict what further education will look like in a decade.
The path that a child in your life takes may not be one that the funds in a 529 plan can be used for. So you might not want to lock your money up in something that can only be used for college.
Maybe the child in your life will want to become a welder or carpenter and go straight into a trade apprenticeship. Or maybe they’ll become a travel blogger and want to use the money to travel the world instead of attending university.
In either case, they’ll need money, but they don’t necessarily need an education fund.
3. Understand alternate 529 plan uses
If a child doesn't end up attending college, that doesn't mean your 529 college savings account is useless.
You can always change the beneficiary on the plan to a younger sibling or another child.
Up to $10,000 per year from a 529 plan can also be used to pay for K-12 private school expenses.
If a child won't be attending college because of a disability, up to $15,000 per year can be rolled over into a tax-advantaged savings account for disabled individuals (ABLE account) too.
Worst case scenario, you can withdraw the money from a 529 plan and pay income tax on it, along with a 10% penalty.
4. Consult a tax professional or financial planner
A financial planner or tax professional might charge you a rate of $100 per hour or more. But it can often be worth the expense to get their insight and make sure that you’re preparing for a child’s college savings appropriately.
An expert can help to assess your situation and provide a custom-tailored and optimal solution based on your income and other factors.
They can also help you understand exactly how much you can afford to set aside for a child’s education.
If you end up being able to afford less than you anticipated, you can use that information to start looking into alternate ways to fund your student’s education.
How To Prepare With College Fast Approaching
What if you’ve waited until a child’s senior year before thinking about college preparation?
Maybe you’ve even waited until the child has confirmed their college admission.
If you haven’t saved any money yet, what are your options? And how can you prepare with the time that you’ve got left?
Even if you've been saving for the further education of your high school student, these items discussed below can really help to lessen the burden of paying for post-secondary education.
5. Research financial aid options
Find out what kind of financial aid the child in your life will be eligible to receive.
The easiest way to do this is by having them fill out the FAFSA (Free Application for Federal Student Aid). It’s a free form that all US students can fill out and submit to the Department of Education.
After completing the FAFSA, you’ll receive a Student Aid Report (SAR), letting you know what kinds of financial aid and other benefits the child is entitled to.
Be sure to make use of all of the resources that you’ve got available to you. You don’t need to sacrifice your own Roth IRA or retirement savings to pay for a child’s higher education. There are often other options available.
6. Apply for scholarships and grants
There are a large number of scholarships and grants available each year. It just takes some work to have a child sit down and apply for them.
For many scholarships and grants, there are few applicants and the competition is low.
It’s well worth the time to research and find each scholarship or grant that the child in your life might qualify for. It'll save both you and the child thousands of dollars.
Be sure to convey to the child in your life why this is important for them too. Any money they get through grants or scholarships means less student debt that they’ll need to pay back later.
7. Consider more affordable schools
Your child may want to attend one of the most prestigious schools. But any added benefit from these more-respected institutions usually isn’t worth the additional cost. Look for schools with less name recognition but similar programs instead.
Attending a local community college or in-state college can save a significant amount of money, especially in terms of housing and transportation costs.
Employers might be a bit more impressed with the resume of someone who attended Yale or Harvard compared to a community college. But probably not to a point that warrants taking on years worth of extra student debt.
8. Avoid private student loans
Private loans come with a higher interest rate than what a child can receive through financial aid, so it should be a last resort.
If you need to cosign for a student loan, it's really like you're taking out the loan yourself. You are guaranteeing repayment if the child cannot pay.
Even private student loans can’t be discharged through bankruptcy. So make sure the loan is something that you’re able to pay off before taking it out.
It may even be worth delaying college for the child to work and save up for a year, rather than taking out a private loan. Ideally getting a job related to the degree that they’re looking to complete in the process. That way, they’ll have real-world experience related to their major once they graduate too.
9. Plan for unexpected college costs
You expect to pay for basic things like tuition, as well as room and board when the child in your life goes to college. But there are other costs associated with attending college to consider as well.
Expect to pay hundreds of dollars per semester for textbooks alone. Plus school supplies, food, and travel costs.
Allow some extra money for the child in your life to join clubs and student organizations, as well as pay for entertainment.
While college life is a time for studying and hard work, it’s also a place for a child to socialize and discover more about themselves as a person. So don’t deprive them of some extra money for extracurricular activity as well.
10. Teach the child in your life how to budget
You can’t just hand a savings account over to a child and expect them to automatically know how to use it responsibly.
You’ll need to teach them financial literacy — how to budget and make their money last. If you don’t know how to budget yourself, this might be a good learning opportunity for both of you.
Expect some overspending by your college student at first. Don’t get angry about it. Provide guidance and help them work through it.
Setting ground rules in advance can help avoid larger misunderstandings later on. Make it clear how much money they’ll be receiving and when. As well as the options available to them in case they run out of money for the month.
11. Contact your insurance company
If your child will be taking a vehicle in your name to school, expect your insurance rates to change.
The opposite is also true. If a child isn't driving your car any more, your rates will drop since they’re no longer on your plan. Or if they are, they’ll only be listed as an occasional driver.
Ensure your medical coverage still covers the child while they're attending college too. You'll want to know what hospitals near campus are in-network in case they need medical attention.
If the child in your life is living off-campus, they may also need renter’s insurance. Many apartments require it as a condition of the lease.
It might be worth specifically insuring a child’s more expensive items like laptops, phones, and other electronics too. There are a number of situations it could be helpful, like if their dorm room is broken into, or if they accidentally leave their laptop in the library and it goes missing.
Nobody likes paying for insurance. But it’s better to pay a bit each month and not need it, versus having to pay thousands of dollars out of pocket if something happens.
Learn How to Prepare for College
In terms of how to prepare for college, starting early is always the best option.
If you start saving for a child’s education when they’re young, you can take advantage of compound interest. That way you can contribute only a little bit each month, but have a big college savings fund by the time they’re ready for school.
You should also consider alternatives in case the child in your life decides to not go to college.
A custodial account, like what EarlyBird offers, is the simplest way for parents, friends, and family to collectively invest in a child's future. This money can be used toward anything, not just their college education. Download the app and set up an account in just minutes.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.