College Financial Planning for Preschoolers

For over 25 years, I have presented to audiences at high schools and college fairs. Before I present, I ask a number of questions to better understand my audience. One question is to ask how many folks in attendance are parents of high school juniors or seniors. Invariably, the majority raise their hand and I jokingly (?) respond that for these parents, it is not a financial aid presentation night, but a financial aid “panic” night. While the audience is kind and offer a half-hearted smile or chuckle, for the majority of parents, this is a fact: families have not adequately planned and saved for college costs.

At this point in my usual presentation, it is not my purpose to heap guilt on families. After all, each and every one of us have unique situations which require our resources to be prioritized. For the most part, toddlers and preschoolers require clothes, shoes, and medical visits well before we begin to think of them as ready to start college. With many young families balancing tight budgets, setting aside money for college may be the last thing on the minds of parents of young ones.

Yet parents of preschoolers are uniquely positioned to start saving for college early, thus avoiding the potential for a financial aid "panic" night years from now. When it comes to college savings, it is critical that I state the obvious (and often most difficult to achieve): the sooner one begins to save, the better off one will be towards meeting their goal.

Finaid.org provides the following example: You have a child just born and you start saving $10 per week. By the time the child turns 17, with 4% interest, you will have saved $12,663.44. If this same family waits until the child turns 4 to recognize this savings, they must save $56.12 per week. The family that begins saving at birth gets 30% of their savings from compounded interest. Even a small monthly contribution, over time, will serve your family well.

I recommend parents still keep an eye on personal debt (don’t let it pile up), try to save some money for emergencies, and plan for retirement. Keeping these in mind, the following list is of various educational savings accounts parents can consider:

Education Savings Account (ESA, or Educational IRA)

You can save $2,000 per year per child (after taxes) and is tax free. You will not pay taxes when you withdraw the money for educational purposes. Income ranges do apply.

529 Plan (or Qualified Tuition Plan [QTP] named after section 529 of the Internal Revenue Code)

You are able to contribute much higher amounts than an ESA. Generally, there are no income limits or age restrictions and you are not restricted to your state of residence. You will need to determine if there are restrictions when transferring benefits to another child.

Uniform Transform to Minors Act or Uniform Gift to Minors Act (UTMA, UGMA)

These accounts are in the name of the beneficiary, but controlled by a custodian, who controls this account until the child reaches the age of 21 (UTMA) and 18 (UGMA). Funds can be used for expenses other than college, but you cannot change the beneficiary.