Saving for college is one of those things that all parents worry about. Whether your kids are just born, heading to elementary school, in middle school, or (especially) in high school – you’ve likely seen all the headlines about how college is going to cost a ton by the time your kids head off to school. If you’re an avid reader of personal finance articles like I am, you’ve likely also read horror stories of parents sending their kids off to college and going broke paying full price for expensive out of state schools.
For the longest time, I couldn’t find any good articles on saving for college. Either the article would be all about how you have to do other things (pay off credit cards, car loans, save an emergency fund) first, or it would repeat that tired old saying about how you need to save for retirement before you save for your kids college. “Your kids can get loans for college, but you can’t get loans for retirement” (Guess what? That’s not necessarily true, if you make a high income. The government doesn’t give you money just because you don’t feel like saving). There was little, if any, advice on how to save for college once you had your other financial ducks in a row.
So years went by and I was unclear what I should be doing when it came to saving for college. I put away money regularly in a 529 for each child starting when they were born, but given the huge range of prices for college (anywhere from $10k-$60k per year depending on the article!) and the uncertainty of college inflation, I felt helpless to get more specific in my savings goal.
Last year I had a breakthrough in my college savings strategy that I want to share with you today. I call it the “College Compact.”
This idea was inspired by the Investment Policy Statement, which is another key to financial freedom. I was giving some serious thought to how I could get more specific with my college savings goals. My oldest son is going to enter high school next year, so college has become a short-term goal. Now that college was fast approaching, how could I figure out if I was on track-or not? I still had no idea what school he’s going to go to, or what college inflation would be like. I have a strong desire to help my kids with college so they can have a better start and struggle less than I did – I put myself through college entirely, starting with community college and ending with my MBA. But I have no desire to provide a blank check. So after giving this lots of thought, I developed the “College Compact”.
What’s the “College Compact”, your might ask? It’s a detailed, two-page long agreement with myself and my children on what I will – and what I won’t – pay for. It sets a clear goal for you to target, and clear expectations for your kids so there are no surprises when they apply for colleges.
Creating Your College Compact – Five Easy Steps
Now that I’ve given you an overview of what a “College Compact” is, let me walk you through how to create one. When you’re done with this exercise, you’ll have a clear agreement with your kids – and yourself – on what you’re going to fund.
- Pick a target school and decide what you’ll cover – This was one of the keys that was missing from my plan all these years. Instead of reading general advice and articles on the huge range of costs for college, you need to first pick a college that represents what you’re willing to pay for. I decided I was willing to cover 100% of tuition and room/board at our in-state flagship college. By picking a specific school, I can visit its website every year and see exactly what tuition/room/board costs. I can then compare this exact cost with my savings and see if I’m on track or not.
Your decision will likely be different than mine – and that’s fine. The point here is to pick a target school, and to pick a percentage you’re willing to cover. Perhaps it’s 50% of your alma mater, 75% of the cost of a specific private college, or 100% of tuition only (no room or board) at a local state school. Picking a specific target school lets you zero in on how much you really have to save. It also doesn’t mean you’re locking your child in to actually going to that school – what you’re doing is locking in what you’re willing to pay for.
What if there’s a gap between what you decide to fund and where your child decides to go? There are a lot of ways to fill that gap. Your child can work and earn money to make up the difference; they can get a scholarship or grant; or they can take out loans. Also, if you’re in a better financial situation a few years down the line, you might decide to increase what you’re willing to fund.
Pro tip – make sure to visit the detailed breakdown of costs offered by the bursar at your target school, and don’t rely on the general cost information. There are sometimes options to save money in the details, like selecting a less expensive meal plan.
2. Decide what you’ll pay for -and what you won’t – After you’ve picked a target school and a percentage you’re willing to fund, now you need to think about all the other costs your child is likely to incur in college. Books. Internships. Car insurance (if you let them keep a car). Cell phone bills. Dinners out with friends. Laundry. Travel to/from home (if they’re in an out of state college). Supplies. Room decorations. Clothing. There are a seemingly endless amount of other expenses that can go along with sending a child off to college, most of which can’t be covered by a 529 plan (books and computers can). You need to decide what of these you’re willing to pay for – and which ones your child will need to cover. You may also decide that you’ll provide a minimum amount towards an expense and your child needs to pick up anything over that amount.
The point here is to both be clear with your child on what you are and aren’t willing to pay for, and to make sure that you’ve thought ahead and set aside enough money to cover the things you’re willing to fund. You also don’t want to break the bank covering your child’s drunken exploitations and shopping sprees (believe it or not, I read an article where this happened to a father).
3. Outline expectations – Will you pay for your child to get any major in school, or are there specific ones you’re willing to fund? How many years of college will you pay for? Are you paying just for undergrad, or also graduate school? What grades does your child need to maintain? What are your expectations for their behavior? Are you planning to fund the most expensive meal plan, or the least expensive one? Do you expect them to buy used books, or rent them online? Will all room decorations come from Ikea, or second hand?
Spend some time thinking about all these things, and jot down what you’re willing to cover. Again, there are no right or wrong answers here. You need to decide what works for your family, with your income, and your values. If something is financially out of reach for you, make sure to be clear in your compact that you’re not covering it. The point here is to be realistic with yourself, and very clear with your kids, what the plan is for their college years.
4. Decide what will happen to the leftover money – Maybe your child is brilliant and will be offered a full-ride scholarship to an ivy league university. Or perhaps they score some grants that decrease the cost of school. It could be that your child ends up needing to spend time at community college and then goes to a state school, costing substantially less than what you were targeting. Or perhaps they don’t end up going to college. What to do then?
Think through these various scenarios and decide what you’re willing to do with any leftover money. Your child might mistakenly think that they money will be theirs to do what they want with it. But if you’re saving for college correctly, the money will be in 529 plans or in your name, meaning it’s still your money and you make the decisions on what happens to it.
What can you do with it? You could decide that anything extra goes to the next kid in line to help you meet your goal for them. After all, you’re funding “up to” the amounts you’re outlining in your compact-it doesn’t mean your child is entitled to the money. Other options are to use any excess to fund graduate school, or save it to fund college for their children. You also could decide to take the penalty (if it’s a 529) and use any excess to help your child fund a ROTH, a down payment on a house, or a wedding. Deciding ahead of time helps your child to know exactly what will happen if they spend less than you offer-and might incentivize them to spend less.
5. Write the letter – Using the decisions you’ve made above, write a brief letter to your children outlining your goal, your expectations, and the events that may make you need to change the goal. It only needs to be one or two pages long, and it will crystallize your own goals and expectations for college. This is something you’ll want to revisit every year – updating your target amounts, seeing if you’re on track to meet your goals, and adjusting your savings or the compact (or both) if you’re not on track.
Example College Compact
Below is an example of a one-page “College Compact” you can use to get started thinking about your own agreement:
Going to college is a great privilege. We, as your parents, are very proud of all that you’ve accomplished and we’re looking forward to helping you through college. College is a very expensive and time-consuming commitment, so we want to make sure we’re helping you in the right way. It’s also a very important goal for us, one we’ve been saving for since you were born. We have to fund college for three children, so it’s important that we have enough funds for all three of you to attend college. Here is our agreement with you on what we will pay for:
- We will cover the equivalent of four years at 100% of tuition, room, and board for an undergraduate education at our states flagship university – UCONN. As of today, 2/20/2017:
- Tuition is $7,033 per semester, or $14,066 per year
- Room for the least expensive option is $6,660 per year
- Board for the least expensive meal plan is $5.228 per year
- Total: $25,954 per year
- NOTE: We will only cover four years of college. Any additional years will need to be funded by you
- We will also help you fund books purchased online, used, or rented through Amazon or another source. We will purchase you a Chromebook computer for use while you’re on campus.
- You will be expected to cover all other expenses associated with going to school – time with friends, car insurance, cell phone bill, decorating your room, etc. These costs can add up, so be sure to work and save money
- You do not need to attend the flagship school – you go to a more expensive school, you can make up the difference through work, scholarships, grants, or loans
- Be careful with student loans! Many people going to college find themselves graduating with way to many loans, and it’s a struggle for them to pay off the loans every month
- Before you get a loan, we will sit down together and do the math to make sure you’re making a wise investment choice
- We expect you to behave like a gentleman while at college. We reserve the right to revoke this agreement due to your behavior (such as suspensions, expulsions, drug use, etc.)
- We expect you to maintain a minimum 3.0 average throughout your schooling years. If your grades drop below that point, you will need to fund school on your own until your grades come up
- If you spend less than this agreement outlines, any excess amounts will be saved to fund your graduate school (masters, PHD, JD). If you decide not to go to graduate school, the excess will be used to help fund college for your children one day.
- Although this is our goal right now, we know that life happens. In the event of a catastrophic event (disability, death, job loss, etc.) in our family, we may need to change our goal. If we do need to do this, we will let you know as soon as possible and work together through it
We’re excited to help you with this journey into adulthood by funding your education, and we’re looking forward to working together as a family to make this happen.
Love, your parents
Why A College Compact?
When your kids are small, it’s hard to imagine them one day heading off to college. The days drag on sometimes and it seems like your kids will never grow up. But it’s true what they say- you blink and suddenly they’re not a baby, or a toddler, but they’re heading off to high school. The days are long, but the years are short, as they say.
Yes, this baby turned into this teenager faster than I thought possible
Creating a “College Compact” helps you to set a very specific goal, and outline your expectations so you don’t get caught up in the excitement of college and spend on things that you wouldn’t ordinarily be willing to pay for. Also, it make sure your child knows what is expected of them, so there are no surprises for them or for you. Revisiting the compact each year lets you make adjustments if your financial situation changes for better (or for worse).
It also lets you have more meaningful, age-appropriate conversations with your kids on what your expectations are for college. My oldest son is only 13, but he already knows what we’re willing to help fund in a general sense. As he gets older and approaches college, we’ll share the college compact with him so he knows all the specifics. Since college will only be a few years away at that point, we’ll have a much better sense of what we can realistically pay for than we did back when he was born.
What does your college compact look like? Let me know in the comments, or drop me an e-mail (through the Contact option) with your compact and I just might feature it on the site!
Check out more about saving for college in my guide to college gifting, why sometimes the advice that you can get loans for retirement but not college is wrong, or my thoughts on the How America Pays for College study by Sallie Mae.
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