From Dreams to Degrees: Planning for College Expenses

It’s natural to want the best for our kids. Same goes for nieces and nephews and those cute younger cousins. The dream about a better future for them often starts with sending them to college.

College can help set your family up for that dream life. But higher education is expensive. We’re talking big numbers for these big dreams.

• For 2023–24, the average public four-year in-state tuition and fees bill was $11,260 per year, according to the College Board.

• Private four-year schools were much higher, with an average of $41,540 each year.

• Historically black colleges and universities (HBCUs) cost 27 percent less than attending a comparable non-HBCU, as UNCF points out.

Things like the type of school, its prestige and whether the student lives on campus or not affects the cost. And sorry to say, these are “per year” numbers, so the total is about four times higher. A recent Northwestern Mutual Planning & Progress survey found that nearly all Americans (95 percent) currently saving for their children’s college education expect to cover more than half of the cost. For parents who identified themselves as Black or African American, it’s even higher at 99 percent. Whatever you plan to contribute, the numbers can feel intimidating—especially if you’re paying down your own college loans or credit card debt.

Luckily, financial experts can explain the different financial tools you can use. For now, here are some steps you could take to hit your own goals and still help the next generation.

1. Consider a financial tool designed especially for education savings

Education saving is so important that special financial tools are set up for just that purpose. For example, a 529 education savings plan can be a great option if you have some years before your kid heads off to campus.

Families often turn to these savings plans because of the tax efficiency. Here’s why:

• With a 529, you won’t pay federal taxes on the withdrawals if you’re using them to pay for qualified education costs.

• Some states offer tax deductions or credits on your 529 contributions. You claim them on your annual tax return.

• 529 funds that are not used for one child can be used for another eligible member of the family. Just change the beneficiary.

• If you don’t use the money in a 529 for education, the beneficiary could move the money into a Roth IRA (up to a certain limit). This allows the beneficiary to put the money toward their retirement instead of education.

Another appealing part of 529s is that anyone can contribute—grandparents, aunts and uncles, or anyone else can help out. Most plans offer a way to add money online, providing a more lasting gift than the typical toy or sweater.

2. Take a good look at life insurance

When you plan to help your children or family pay for school, your income becomes even more important. Your loved ones were already relying on your income for day-to-day expenses, and now they will also count on it for their college dreams. Life insurance helps to protect your income and ensure your kids will still be able to afford college if you pass away in midlife.

While you may know that life insurance pays a death benefit, you might not have heard about some types of insurance that can benefit you while you’re still living. Whole life insurance offers a lifelong death benefit, and as you make payments, your policy will build up cash value over time. You can use that cash value for any reason (although doing so will reduce your death benefit).

Or you could take out a loan against the policy’s cash value. You can get the borrowed money quickly without tons of paperwork. Keep in mind that if you were to pass away before paying back the balance of your loan, your death benefit will be reduced by the amount of the loan.

3. Think through different types of loans

To help kids chase their dreams, many parents end up taking out public or private educational loans. Or they might co-sign on their kid’s loan. If you see yourself doing that someday, you definitely won’t be alone. 

Before you co-sign, think about whether you’re a homeowner who could use an option such as a home equity loan or home equity line of credit (often called a HELOC). That might have a better interest rate than an educational loan because you’ve got the equity of the house as collateral. Remember, though, that your home would be at risk if you default on the loan.

Avoid dipping into your retirement savings

If you’ve already started saving for your retirement, that’s awesome. Keep putting money into the 401(k), 403(b) or individual retirement account. Resist the urge to pull back on that good habit to help a younger family member (even though your heart tells you otherwise). You could actually be putting more pressure on your kids down the road if you’re not prioritizing your own retirement.

And think twice if Grandma or a rich auntie talks about emptying out her retirement savings—it’s not usually recommended. While college students can take out student loans to fund their education, it is much harder for retirees to finance their living expenses.

Keeping saving for retirement (and paying off debt) each month. You and your family can try to free up some money to save toward college by pulling back in other areas. Or think about helping your kid by co-signing on a college loan when the time comes. A financial advisor can help you look at different ways to support your family—for education and retirement.

Talk with a financial advisor

There’s a lot to consider when it comes to saving for college. This is where a financial advisor can share realistic ideas to help make college more affordable for the next generation.

Your Northwestern Mutual financial advisor will get to know you and learn where you are with your money today. They will ask deep questions and then give realistic, personal advice. They can provide ideas to both grow and protect your wealth—and recommend strategies to pay off any debt you have. By looking at the big picture, your advisor can point out opportunities and blind spots that you might overlook.

Get started today to turn your dreams for tomorrow into reality.