Budgeting for early childhood education

It’s not a secret that college is expensive. In fact, you may still be paying off your own student loans while simultaneously scouring the internet for tips on stashing away for your children’s college funding. And while you may have always had it in your mind that you’d help your child pay for college, you could find yourself experiencing major sticker shock over pre-school or early childhood programs much sooner.

These days, many parents are facing education and school tuition costs from the time their kids are in preschool or private elementary school. That means parents could be shelling out money from as early as age two or three for their kids. Early education funding which may be part of a daycare program that includes a preschool component — can be a growing point of financial stress for many families. With the total cost of sending your kids to an independent school growing at a rate that rivals inflation over the last 20 years, the stress doesn’t seem to be going away soon.

Of course, public school is a valuable (and economical) option for many parents, but some families may discover that a private school is in the best interest of their children. Some may be drawn to the programs a private school offers, want to send their child to a religious school, or may find their child works best in a specific private school environment. Or perhaps you have younger kids, your city or town doesn’t have a public pre-k option, and you want your toddlers to attend a preschool program. So, what’s a parent to do? How can you prepare for the expense of early childhood education? And when should you start to think about it?

Start planning now

If you know private school or private preschool is in your kids’ future, it’s never too early to plan. When your child is an infant, it seems like schooling is on the distant horizon. Unfortunately, time always moves faster than we anticipate, and you’ll be dropping them off on their first day before you know it!

This means it’s best to get ahead of the curve. The earlier you start to plan, the more time you have to make decisions about how you’re going to finance their education. Even if you won’t be paying tuition for several more years, you can start now by setting and quantifying savings goals and, more importantly, doing your research on typical costs in your area.

Knowing what you want out of your children’s education is key when you start your school search. By understanding the costs associated with the private schools and preschools that are best aligned with your goals ahead of time, you can better financially prepare.

Keep in mind that as you start to look at schools in your area, you’re looking for a place that’s both an educational and financial fit. You can ask questions, sit in on a class, observe free time or recess, and speak directly with principals and teachers. It’s also a good idea to ask for references from families already or previously in attendance.

Finally, don’t be afraid to ask about ways to reduce tuition! Some private schools offer scholarships, grants, or discounts for parents who volunteer regularly or can barter skills, like writing the school newsletter or serving as the on-call computer tech for the school. Negotiating the total cost of tuition may also be an option, so don’t be afraid to ask.

Consider a 529 plan

A 529 plan is an educational savings plan sponsored by a state that offers a number of investment options. The benefit is that any earnings grow federal income tax-deferred and distributions for qualified education expenses are federal income tax-free. However, if you withdraw money for any other reason, you’ll face state and federal income taxes plus a 10% federal tax penalty on earnings.

In 2018, 529 plans were opened up to be used for private K-12 school tuition as well as for college education expenses. You can withdraw up to $10,000 per student per year from a 529 plan to pay for primary or secondary education. This money can only be used for tuition (not school supplies or books).

If you already have a 529 started for your children, this might feel like a huge weight has been lifted off your shoulders. However, using a 529 to pay for private school is not as simple as it sounds. Although the federal government created 529s, each state administers them individually, which means your 529 plan may not be fully on board with allowing you to withdraw funds for K-12 education costs just yet. So proceed with caution here, work with a financial planner, and see if your state has implemented the change before withdrawing funds to avoid the potential for penalties on withdrawals.

Explore financial aid options

Financial aid isn’t just for college tuition. The private and preschools you’re considering may offer financial assistance programs, either through the government or through private scholarships. Although you may not qualify for government grants or loan programs, merit-based scholarships are often available and are worth exploring regardless of your income.

Most private schools will keep a list of resources and information on hand about all scholarships, student loans, or other financial assistance programs that are either offered through the school itself or from outside sources. You can also check out organizations such as School and Student Services, which allows you to fill out financial aid applications for the schools you and your children are interested in.

Experiment with building tuition into your current budget

While the price tag of tuition may seem daunting, one thing to consider is saving now for the most expensive option—even if you’re not sure which preschool your child will go to, or if private school is in your future. Consider creating a budget now that includes tuition, which you can put in a separate savings account. Not only can this provide a financial buffer when the time comes, giving you enough to cover a deposit, if it’s needed, but it can also help you assess your budget and make any lifestyle changes you may wish to make to be able to comfortably put away this amount each month.

Consider leveraging credit card rewards

Credit cards often get a bad rap. While many people use credit cards unwisely and end up in debt, you may also be able to use them as a tool to save money. In some situations, leveraging credit cards to pay for children’s private education might be worth considering.

Many rewards cards offer between 1-2% on every purchase, but there are other options out there that may meet your unique financial needs. Making large tuition payments using these cards can result in a significant financial reward – either in the form of cash back, travel rewards, or “points” that help to take care of other expenses. Of course, this only works out if you have the funds to pay that balance off in full each month. In addition, before using a credit card to pay for tuition in an attempt to leverage the points, it’s a good idea to check with your school of choice to see if they charge a convenience fee when paying with a credit card. If your card doesn’t have a phenomenal rewards system, the convenience fee may cancel out any rewards you gain by using the card for tuition costs.

Consider using your employee benefits

A Dependent Care Flexible Spending Account (FSA) lets you use tax-free dollars to pay for eligible dependent care expenses, like preschool tuition. The contribution limit for 2018 is $5,000. The money you contribute to your Dependent Care Spending Account comes out of your paycheck on a pre-tax basis (before taxes are deducted). This lowers your taxable income, so you pay less in taxes. Some employers offer this account as part of their employee benefits. If you choose to use a dependent care account, keep in mind that if you don’t use the full amount set aside in the account for expenses incurred during the year, you will lose any remaining funds.

Know your priorities

It can be overwhelming to prepare for childcare and private education costs. To better prepare, it can help to reevaluate your spending and your priorities. While your children’s education is obviously important, saving for retirement is essential as well. If you work the costs of preschool or private school into your budget, and you see that you’re struggling to find the funds for the expense, it may be time to re-evaluate your budget.

By cutting spending in some areas, you may find you’re able to free up cash flow to spend money on what truly matters to you — such as your children’s education. When we spend in line with our values, we feel less anxious, and we still find a way to work our wealth to our benefit (and the benefit of our kids).

Mary Beth Storjohann, CFP® and Founder of Workable Wealth, is an author, financial planner and accountability partner working to help clients in their 20s-40s across the country make smart, educated choices with their money. Her recent accolades include the “Top 40 Under 40” by Investment News, “10 young Advisors to Watch” by Financial Advisor Magazine, and “10 of the Best Personal Finance Experts on Twitter.” She frequently appears on NBC as a financial expert and her expertise has been featured in The Wall Street Journal, CNBC, Forbes and more. The opinions expressed in this article are the author’s own.

Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction.