Broker Check

Education Planning for Your Teen

June 11, 2024

As your child approaches their teenage years, starting education planning early and involving your teen in the process is crucial. This section discusses some ways individuals can start the planning process.

1. Start Early with a Savings Plan

The earlier you start saving for your child’s education, the better. Compound interest works in your favor, allowing your savings to grow over time. Here are some popular savings options:

  • 529 College Savings Plans: These state-sponsored plans offer tax advantages and can be used for a variety of educational expenses. The money grows tax-free, and withdrawals for qualified expenses are also tax-free.
  • Coverdell Education Savings Accounts (ESA): Similar to 529 plans, ESAs offer tax-free growth and withdrawals for educational expenses. However, contributions are limited to $2,000 per year.
  • Custodial Accounts (UGMA/UTMA): These accounts are set up in the child’s name, and the funds can be used for any purpose, including education. However, they may have tax implications and could affect financial aid eligibility.


2. Teach Financial Literacy

Financial literacy is an essential skill that will benefit your teen throughout their life. Teaching your teen about budgeting, saving, and investing will prepare them for financial independence. Here’s how to get started:

  • Budgeting: Help your teen create a simple budget that tracks their income and expenses. This will teach them to prioritize and manage their money effectively.
  • Saving: Encourage your teen to set savings goals, whether it’s for a big purchase or future college expenses. Discuss the importance of paying themselves first by setting aside a portion of their income.
  • Investing: Introduce basic investment concepts to your teen. Explain how investments can grow over time and the risks involved. You might even open a custodial investment account to let them get hands-on experience.


3. Encourage Part-Time Work and Savings Contributions

If your teen works part-time, it’s an excellent opportunity to instill financial responsibility by having them contribute to their savings. Here’s how to approach it:

  • Set a Savings Percentage: Decide on a percentage of their income to be directed into savings. For example, you could suggest saving 20-30% of their earnings.
  • Open a Dedicated Savings Account: Open a high-yield savings account specifically for education savings. This can motivate your teen to watch their savings grow and stay committed to their goals.
  • Match Their Contributions: To incentivize saving, consider matching a portion of their contributions. This boosts their savings and reinforces the value of saving money.


4. Explore Scholarships and Grants

Scholarships and grants are invaluable resources for reducing college costs. Encourage your teen to research and apply for scholarships early. Here are some tips:

  • Start Early: Begin the scholarship search in their junior year of high school or even earlier. Many scholarships are available for younger students.
  • Utilize Online Resources: Websites like Fastweb, Scholarships.com, and the College Board’s Scholarship Search can help find opportunities.
  • Maintain a Strong Academic Record: Good grades, extracurricular activities, and community service can significantly enhance scholarship applications.
  • Apply for FAFSA: The Free Application for Federal Student Aid (FAFSA) is essential for accessing federal grants, loans, and work-study programs.


5. Discuss the Cost of College

Having an open discussion about the cost of college helps set realistic expectations. Talk about different types of colleges (public, private, community colleges), their associated costs, and the potential return on investment for various degrees. Encourage your teen to consider factors like:

  • In-State vs. Out-of-State Tuition: In-state tuition is often significantly lower than out-of-state or private college tuition.
  • Community College: Students who start at a community college and then transfer to a four-year university can save a considerable amount of money.
  • Work-Study Programs: These programs allow students to earn money while gaining valuable work experience.


6. Plan for Financial Aid and Loans

While savings, scholarships, and grants are ideal, loans may still be a part of the funding mix. Here’s how to manage this aspect:

  • Federal vs. Private Loans: Federal loans generally offer better terms and protections compared to private loans. Exhaust federal options before considering private loans.
  • Understand Loan Terms: Ensure both you and your teen understand the terms of any loans, including interest rates, repayment options, and the total cost of borrowing.
  • Borrow Responsibly: Encourage your teen to borrow only what is necessary and to think critically about their potential future income in their chosen field.


Conclusion

Education planning for your teen involves a blend of early savings, financial literacy, and strategic use of resources like scholarships and financial aid. Encouraging your child to contribute a portion of their income to their savings account not only boosts their college fund but also teaches them valuable financial skills. By working together and planning ahead, you can help ensure a financially secure future for your teen’s educational journey.


Ready to Schedule a Meeting?

Click here or the photo below to schedule an in-person, virtual, or phone call meeting.

We look forward to working with you!