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Top 5 Do's and Don'ts When Funding Your Child's Education

“An investment in knowledge pays the best interest.” – Benjamin Franklin. One of the most frequent and impactful goals we help our clients achieve is funding education for a loved one. This can be incredibly rewarding for the funder. It is also very much appreciated by the recipient as the debt created by increasing college expenses has evolved into a huge financial burden for the next generation.

Here are some of the best practices we have identified as we have helped our clients navigate this exciting process. 

 

Do:

 

  1. Do have discussions to enable alignment with your spouse or significant other around paying for education. We have found that there are strong and varied opinions on this topic. Most often, clients want to give the same level of support that they were provided. However, this sometimes creates tension as every family is different. Do you want to pay for all, part, or none of higher education expenses? Does an older generation have an interest in helping with this expense? An advisor can help you facilitate these discussions. 
  2. Do provide whatever level of financial support you are comfortable with and can afford. Any college student will tell you it all adds up and every little bit makes a difference. Relatively small contributions will add up over time.
  3. Do create a financial plan that balances your future financial needs (large purchase, retirement, education funding, etc.) keeping in mind you can’t borrow for retirement like you can for college.Fortunately, there are many other ways to pay for college like scholarships, aid, or income from a job.   
  4. Do explore different types of college savings accounts that may fit your needs.The most common option is a 529 plan, but not every 529 plan is created equal. Check with your advisor to see which plan is best for your family’s situation. 
  5. Do be aware that the type of financial account and how its titled can impact a student’s ability to get financial aid. 
  6. Do talk to the student openly and honestly about your families plans for funding their education. Often, parents are surprised at how thoughtful their children are when presented with different choices and this can make for the most successful education funding plans. An added benefit can be the lessons for the student in adult decision making. 
  7. Do consult with your tax professional before you implement your educational savings plan.  

 

Don’t: 

  1. Don’t feel like you must pay the entire bill for college. This could be a very large number and there are lots of options available to pay for education. It can also be good for students to have skin in the game as it tends to hold them more accountable for their academic performance.   
  2. Don’t forget to explore the different types of accounts and how they should be titled. While some options may have tax advantages, it’s important to understand how those accounts may affect the future student’s financial aid. An advisor can help you with options that make sense for your situation. 
  3. Don’t worry too much about what happens if the student does not use all the funds in a 529 plan. There are ways for other family members to utilize those funds. In the unlikely event that other family members don’t use them, there are still potential opportunities to recover most, if not all of the funds.
  4. Don’t worry if you don’t haven’t started saving for your childrens’ or grandchildrens’ education yet. Today is a better day to start than tomorrow and there are all kinds of creative ways to pay for college as I discussed above. 
  5. Don’t forget to discuss education funding with potentially interested family members.I know of one example where the parents didn’t know that the grandparents had already saved for the grandchild’s education. The family unnecessarily agonized for months about paying for the students more expensive first choice and thankfully found out just in time to enable attending that school.  

 

Finally, depending on your views of education funding, circumstances, and the personality of the student, you might think about creating some “achievement hurdles” for the student to attain. We have seen these types of hurdles incentivize students to make the most of their college experience. The goal for most families is for the student to receive an education that sets them up for success while also enjoying the social aspects of higher education, not just the latter. 

 

Some achievement hurdles that you may want to consider:   

  1. The student must maintain at least a 3.0 grade point average to receive the funds.
  2. Pay the tuition bill at the end of each quarter and if the student’s credits aren’t satisfactory, perhaps they must take out a loan. 
  3. Have the student take out student loans from the beginning with the understanding you will help pay some or all of these off upon graduation if/when they make it.

 

In conclusion, I have identified some do’s, don’ts, and other areas to think about regarding helping fund college for a loved one.  If you are fortunate enough to be able to do that, it is one of the most powerful gifts you can give with the benefits lasting a lifetime. 

About the Author

Rob Blethen, CFP®

Rob Blethen, CFP®
Executive Vice President
D.S. Baker Advisors
Walla Walla

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