College Planning for Today

March 04, 2021

Kids cost a lot. As financial planners, we know the expected average cost that a child can be to a family. As a parent, I know that the actual figure can be much more than that average. In this blog, I will talk about one of highest costs involved for many parents: college.

College is important. Take a look at the graph below. For those students who graduate college, they have that much higher earnings potential which typically leads to improved livelihood. A college degree typically pays for itself by age 30. Further, college graduates enjoy much better job security and job opportunity especially during economic downturns.

But college isn’t cheap. College tuition costs have increased more quickly than just about any other household expense in recent decades with the average annual inflation rate at 6% over the last four decades. The cost of college typically rises because schools continually spend more money to attract the best students as well as hire more faculty and administrative staff, while receiving less and less financial support from the states. Further, due primarily to Covid, college enrollment has fallen (down 13% from 2019-2020) and as a result many institutions are starving for revenue and under tremendous fiscal pressure. In a nutshell, we don’t see college costs getting cheaper any time soon.

Take a look at the graph below to see where the average cost of public and private tuition is for a four-year program now for an 18-year-old versus what it could be for a newborn. Those figures could make any parent cry! The key is to start planning early. It’s also essential to be realistic about financial aid and making sure that savings earmarked for college should be invested.

The good news is that close to 60% of families receive some type of grant (which are based on financial need) and/or scholarship (which are merit-based). Unfortunately, the dollar amount involved averages less than $8000 per year. Hence, understanding what the cost of college is per the graph above, this barely makes a dent. In fact, only three out of 1000 college students receive enough in grants and/or scholarships to cover their full cost. Regarding grants, one can check the College Board Expected Family Contribution (EFC) Calculator to determine their federal financial aid eligibility. Unfortunately many of the families that we work with won’t be eligible.

So then the question is, is a merit-based scholarship in the making for your student? Scholarships are awarded for exceptional grades, exceptional test scores, exceptional athletics, etc. But as a parent that just went through the college application process with our older child, we know that the big name colleges are extremely competitive. Merit is really hard to come by unless that student is “perfect-perfect”, think 5.0 GPA and 36/36 ACT. Frankly, we were shocked at how such little merit was offered from the bigger schools that our son, Jackson, applied to. The good news is that if you’re willing to go to a school that’s not in the “top 50”, your chances of a merit-based scholarship improves dramatically and you may be able to save literally hundreds of thousands of dollars. For Jackson, we settled upon a wonderful engineering school in Milwaukee instead of a big-name school near our country‘s capital, thus saving our family potentially $200,000+ over the next four years!!!

Of course, there’s always the option of student debt, but it can be a major burden. Do you really want your child having that heavy weight above their shoulders right when they’re trying to launch their career and possibly start their own family?!?

By planning early, families can really make the process a feasible one versus one full of concern and anxiety. And one of the best ways to start is via a 529 college savings plan. These plans offer extremely nice benefits including:

  • Tax-free investing and withdrawals for ‘qualified education expenses’.
  • Account owner control for the life of the account.
  • No income limits on contributions or age restrictions on beneficiaries.
  • High contribution maximums (often $400,000 or more per beneficiary).
  • And for estate planning purposes, they allow contributors, e.g. a wealthy grandparent or other family friend to “front-load” it by putting in five years’ worth of gifts, thus a tax free gift of up to $150,000 for the beneficiary in a single year can be done! NOTE:  There are other different vehicles for college savings including custodial accounts like an UTMA/UGMA or a Coverdale Education Savings Account, but we typically see the 529 as the best fit for our family and clients.

At the end of the day, it’s important to not just start saving early, but also to invest ASAP. With the inflation rate of college at 6% per annum, simply saving money in cash won’t get the job done. The sooner you start investing, the more time you have to grow your college fund via the power of long-term compounding. So put your college investing on auto-pilot with regular automatic monthly or semi-monthly payments and watch it grow! Here’s a great chart below to show exactly how much monthly investment is needed to achieve a public or private college funding goal. One can see the importance of starting as early as possible.

Once a 529 plan is up and rolling it’ll be smooth sailing, but you’ll want to monitor your progress to assess if you’re staying on path. Once your student reaches high school, college planning will take on a much bigger role. For our family, things really got going in the junior year and college planning became a daily conversation. Check out this preparation checklist which focuses on many of the steps involved. Unless you’ve been through it, you probably won’t be believe the amount of research, the amount of time, and the amount of emotion required to find the perfect fit for your student. Fortunately, for us, Jackson found the perfect fit with MSOE. He couldn’t be happier and we’re so proud of him!

In conclusion, we hope this blog gets those parents and those folks thinking about having children some color to what goes on with college planning essentials. As a financial planner and family member who has personally gone through the process recently, I can tell you that the most essential part is getting started as early as utterly possible. Truth be told, I had a 529 plan established the day after Jackson’s birth. Never too early to start!


Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page