• College
“I Don’t Even Have Kids Yet!” Why Do I Care?
I know some of you are pretty young and just graduating college yourself, while others of you may have recently got married and just had children. These are all great positions to be because, like most savings strategies, “more time” is our friend.
However, this post is going to assume that someday when or if you already DO have kids, that you’ll want to send your little Princess or Jedi (… there’s a Star Wars theme going on in my house right now) to college and give them every advantage possible.
What’s Going to Be the Damage?
(… Queue the scary theme music from the Halloween movie …)
A quick review of my alma mater’s website estimates the following 2011-12 costs:
• Two semesters of in-state undergrad will cost $21,026 (assumes $12,822 for Tuition and fees at 15 credits/semester and $8,204 for housing and meals).
• That’s a total of $51,288 for four years (120 credits – even though most people probably take closer to five years now) if you just isolate the tuition and fees.
That cost of $13K is roughly twice what I paid for tuition when I started 14 years ago. For simplicity, let’s assume that by the time your kids are ready to go to college (let’s say 18 years from now), the price doubles again:
• Approximately $102,576 for four years or $25,644 per year! Ouch!
If you invested in a set of semi-conservative funds returning a combined annual 6% return over the next 18 years, that means you’d need:
• $3,131.14 per year or $260.93 per month!
Who Do You Love?
Great, huh? If you were struggling to make room in your budget for retirement, how are you going to save $261 per kid per month for the next 18 years?
• Answer: You’re probably not.
That’s right. As much as we’d all love to give our kids everything in the world, the reality is that there simply may not be enough money to go around to FULLY fund both your future and your children’s education. Given the choice between the two, please remember:
• Make sure you pay yourself (and your retirement) first before you worry about budgeting for college savings.
Now before you equate this statement to having your children wake up on Christmas morning with no presents under the tree, keep the following things in mind:
1) Your kids can always get a loan for school. You can’t get one for retirement (… at least not any kind of loan you want anything to do with).
2) Your kids will always be able to work off their loan throughout their most productive years. You, however, will have less and less potential to keep working the older you get.
3) There is always the possibility that your child may not want to go to college. You, on the other hand, will certainly want to be retired someday.
What You Can Do:
Notice earlier I said you may not be able to “FULLY” fund their education. What about “partially”?
Maybe I won’t be able to save the full $102,576 per child, but I could probably still invest about $100 per month! Remember that every little bit helps!
Just like retirement accounts, college savings plans have different advantages over regular-old savings:
• 529 Plans – This is one of the plans I use. These types of accounts are kind of like an IRA except that the proceeds are intended for college and have State tax benefits. In general, the range of things you can use these funds for is pretty wide (tuition, fees, room and board, books, etc). One negative is that the choices for the investments is usually pretty slim.
• Pre-Paid Plans – This is where you literally “buy” a semester of college today that your kids can use later. Each State sets their own fixed prices, but it’s hard to say if the price is a bargin or if it is too expensive. Check the fine print – the “plan” you buy usually DOESN’T include room, board, books, etc, so you’ll still have to find a way to pay for these on your own.
• U.S. Savings Bonds – At last check, U.S. savings bonds were tax exempt if used for higher education costs. Bonds would have been a “better” investment years ago, but with recent events, they have been paying VERY low rates lately. But things could always change!
• Personal Investments – Although usually not the most tax savvy, there is nothing stopping you from buying a hybrid mutual fund to use one day for college expenses. I’ve got the Vanguard Star fund setup for my kids. Dividend stocks are also another place to look for slightly less tax burden. And finally you can always leverage the power of high yield savings accounts.
With any of these investments, remember:
• Don’t go too risky. You don’t really have that large of a time-frame to invest within.
Readers – How will you save for your children’s education? Do you have a goal in mind, or do you plan to save whatever you can? How does your retirement stack up against college planning? Does $102,576 seem out of whack, or have you heard other similar insane projections for future college costs?
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Saving for my children’s education will be the last thing I do. My wife and I both worked through college and had to go into debt to pay for the tuition.
While I’ll certainly help my (eventual) kids out the best I can, it won’t be something I MUST do. It will only be done if I can and IF my retirement is properly saved for.
Everyone looks at this topic a little differently. I had a feeling that those who carried debt and paid for school themselves would have a different perspective. As you know, I agree that your retirement has got to priority No. 1.
It is SCARY how expensive college is getting. I was fortunate to live in a state that paid for my tuition at any public school if I stayed in-state. But I’m sure that program and others that are similar will disappear soon because of budget shortfalls.
We’re expecting our first child in November, so I’ll probably start a 529 when we’re ready to start saving for his or her college.
Congratulations on your upcoming first child! Starting that 529 early is not only going to prove helpful but give you an overwhelming sense of relief throughout the years that you’re “doing something” about your child’s education.
What magically generous state did you live in? 🙂 I would have loved for my tuition to be paid for!
We put $500 away each month in a 529 for our oldest. It gets taken out from savings directly on the 2nd of the month, right after we get paid, so we don’t miss it. It’s in a Vanguard target date fund in the Utah state plan (since we don’t get a state tax deduction), and has done pretty well so far because a lot of the investing was during the stock market downturn.
When #2 is born, we’re hoping to do the same.
At some point we will check how much money is in there and readjust based on future forecasts so that we don’t over-save there. (I did very well with scholarships etc. so my parents ended up with a lot leftover from my education, but it wasn’t locked into a 529.) We’ll probably put more in the oldest’s 529 than the youngest’s for that reason, because we can transfer whatever is leftover from the oldest to the youngest after we’ve figured out the actual college cost.
Holy cow do you have your stuff together! $500 per month is awesome! I’ve seen the ads for the 529 accounts on Vanguard. How has that treated you? Correct me if I’m wrong, but you don’t have to live in the State to which you invest in, right?
You actually can invest in any state’s 529. There are some tax advantages for some states if you live in the state. Some states offer no tax advantage at all, in which case it makes more sense to pick which ever program you want to invest in. Utah’s plan is considered to be the best, mainly for its low fees. If you are fortunate to live in the state of Utah and contribute to the 529 plan, you get a state tax deduction on the first $3000 something you contribute.
When I finally do get around to having children, I plan on adequately funding my retirement first. If there’s any money left over for the children, I’ll put aside enough to get them through four years of an in-state university. They can do their part by being exceptional enough to convince someone besides mom and dad to help pay for their college education.
You’re right about your kids needing to earn their own way (to some extent). Scholarships, summer jobs, etc. But even still – a small account made up of just $50 per month will be more helpful than nothing.
Roth IRA for the kid is another option. We have 529 plans for our childrens, but we also want to supplement with other income. A Roth IRA for the kid is an excellent option which [dangerously] puts the money in the hands of the kid. But, it can be a lesson which helps them to learn about money. We plan to do this.
Also, your Roth IRA (not something I suggest) is another way to save for your kid’s education. Remember, IRA accounts [currently] are not included in the FAFSA family contribution number.
I know I-bonds are state and federal tax exempt if used for education expenses. The composite rates of I bonds starting May 2011 has been 4.6%, 3.06% and 2.2%. I don’t know what the rest of your portfolio is doing, but I don’t call that a VERY low yield, especially with NO risk of principal loss. One problem is the limit put on the purchase of bonds. It is limited to $10k per SSN and $5k per tax return. We plan to use I-bonds as well, especially once Junior hits the teenage years, when all money should be out of the stock market.
And I agree with Jason, saving for your kid’s education is great, but remember their education can funded other ways (loans, scholarships, work etc) and you cannot take out a loan for retirement.
Don’t you need to have “earned income” to have an IRA?
Yup. You must have earned income. There’s a neat little trick I learned from The Military Guide’s blog, you can pay your child for domestic work and that is earned income. Pub 15, chapter 3, pg 10 is the reference.
Ha, I don’t know about that. It sounds just a little shady … I think I’ll stick with the 529 plan.
I don’t think parents should feel too obligated to pay for their children’s education. I think my mom found a decent balance. She covered my tuition at a 2 year college program, while I took a student loan out to cover my other expenses. It helped ensure that I took the effort to attend college, but also didn’t leave me saddled with huge debt. It also opened up my eyes to the real world of paying for rent and other bills. You don’t want to baby them too long and pay for all of their expenses.
As a parent, it’s hard to want anything but the best for your kids. Of course college is never really part of the deal or even an obligation – especially with how expensive it’s getting! But someday when they’ve worked really hard and earned really good grades, you’ll want to do everything in your power to take it to the next level.
I was looking into the 529 plan for my future children as well. I already thought about saving as much as I can towards this right now but there’s just so many things to save for that take precedence (down payment for a house, gift fund, travel fund, retirement, etc). I think since I am quitting soon, I will focus on funding for college when I get my next job.
This is great advice. I’m adding this to my fave reads of the week which will be posted up on Sunday!
Awh, thanks Erika! And bravo to you to start looking into this stuff already. However, it does sound like you’ve got some pretty big other priorities front and center. I hope the possible upcoming job change is for the better.
I just started saving for my kids college.Right now I just have it in a regular savings account but I’ve heard ESA’s are a good option.
ESA’s aren’t bad. But you are limited to only $2K per year. Although that sounds like a lot, it could cause you trouble if you skip a few years and then want to put away, say, $5K at once. It also looks like the income requirement is less than $220K, so both you and I are out – I wish! 🙂
I’m going to save as much as I possibly can for them. Especially if I end up having any kind of income that could limit their eligibility for financial aid. I’ll save for my retirement first, but as a parent, my goal is to give them the best life I possibly can both spiritually and economically. College is an indisputable part of that. (And so is making sure I can take care of myself when I’m old and decrepit.)
I agree full-heartedly! With my retirement on track, making sure that my kids will have every advantage possible is my next top financial priority!
529 plans are great for the college savings. I have a daughter at NYU and another at Berkeley. NYU has offered Presidential scholarship, but I still pay for her room and boarding. I am paying nearly 40K a year. I will be happy when they will finish college as I’ve been paying over 30K for the last 12 years now starting with their private schooling. 🙂
Congratulations on having two very prestigious daughters! Although it’s great to be accepted to some great schools, it also comes with a BIG cost to mom and dad! 🙂
I have a 529 plan for my son’s college fund. I’m still working my way up to saving $300 a month, but I slowly increase my monthly deposits whenever I get a pay increase or other income increases. One benefit is that the deposits are all automated, so I don’t have to think about putting the money in, it’s just part of the normal budget.
Welcome to the site Richard! The automated deposits are really nice! Just like my IRA and 401k, it takes virtually no effort to fund these accounts. Good job on having a strategy to increase your contributions.
Loved “What can you do?” part. Nice lay of the land. This whole thing becomes more and more relevant for our family and we are exploring possibilities and the risks. This one is tight and helpful for my orientation. I think we will be using 529 plans and our accountant also suggested we use it.
Even if it’s just a little bit, every little amount will help. Plus with the tax incentives it makes these a really attractive place to build towards your children’s future.
We are far behind where we need to be when it comes to saving for college.. My parents opened a 529 for my boys a few years ago, as a gift.. and after we get out of debt- we plan to match their monthly contributions.
With the cost of college these days, you will need all the help that you can get.
I think you’ve got the priorities right – get out of debt first. That is nice of your parents! I forgot to mention in my post that a 529 is great way for others (like grandma and grandpa) to help out.