Fan Topic Pick: Here it is, the holy grail of parenting…how to save for your child’s college education. Oh yes, we have arrived. I will be upfront with you. If you aren’t actively saving towards and emergency fund AND your retirement, please turn around and exit the building, or promise me that you will file this information away for future use AFTER you’ve taken action to address those two items.
I am not playing around here. I do not want any of you to become what you do not desire your children to be: boomerangs. You are not to be an undue burden on your child because you failed to plan for your own retirement. You will not wallow in debt because you put them first on this issue. Your children can always take out a student loan, but you know what? I’ve never heard of retirement loans and neither have you simply because they don’t exist.
How Much Should I Save for My Child’s College Education?
As with any long-term financial plan, you have got to start with the end in mind. When it comes to college planning, as parents you need to determine exactly what you are willing to cover. Here’s your checklist:
1. How many children are you planning to send to college?
2. How much time do you have left to save for college?
3. Type of School:
- In-state public
- Out of state public
- Private
4. Length of Schooling:
- 2 Years (Junior College, Local Community College, can combine as part of 4 year plan…MMC Money Saving Choice)
- 4 Years
- 5 Years (otherwise known as the five year plan and its becoming normal, beware)
- + Master’s Degree (starting to feel like the new bachelor’s degree)
- + Professional Degree (Ph.D., M.D., J.D., etc)
5. Coverage:
- Tuition and Fees: cost of instruction and campus programs for students
- Books
- Room: cost of living in the dormitory
- Board: food and incidentals
You can check out average tuition costs for a public 2-year, public 4-year (in state), public 4-year (out of state), and private 4 year college published by the College Board. Keep in mind, these are only tuition costs. Room and board substantially more. If you’re a data junkie, the National Center for Education Statistics has a table that shows total costs for full time students in degree granting institutions from 1964-65 through 2008-09.
What Tools Are Available for Me to Save for College?
529 Educational Savings Plans (Prepaid and Systematic Savings), Coverdell ESAs, and UGMA/UTMA (Uniformed Gifts To Minors/Uniform Tranfer To Minors) are the big three savings tools. For the purpose of this post, I’m going to stick to discussing 529 Plans. I believe they are the easiest to understand, most well known, and most popular of the college savings tools.
529 Educational Savings Plans
529 Educational Savings Plans are available though individual states and some educational institutions. As a parent, you remain in control of the account at all times. Your child is not the account holder. These accounts are currently the most popular tool to save for college.
There are two common types:
Prepaid 529 Plans: contracts purchased to lock in today’s tuition rate at public and some private colleges in a particular state.
529 Savings Plan: systematic investing plan rooted in mutual funds that grow tax free and can be used for any qualified higher educational expense.
These plans require as little as $25 to open the account and have an investment cap of $300,000. There are administrative fees associated with these plans, similar to that of mutual funds and other like investments. The fees average between 0-2.5% of your total account holdings per year.
Tax Advantages of a 529 Plan
529 Plans are investments that are exempt from capital gains tax. Also, when you withdraw from your 529 for a qualified educational expense, it is not taxed as income either. If you decide to invest in a 529 plan in your state of residence, you may be eligible for tax rebates on contributions made to these plans.
As Florida residents, we have no state tax, so we have no incentive to invest in a Florida 529, prepaid or otherwise. If you are a resident of a state without income tax or one that does NOT offer a tax incentive, I encourage you to check SavingForCollege.com’s top performers for 2011. You better believe that the plan we invest in is on that list <wink, wink>.
What If My Child Doesn’t Go To College?
If your child does not go to college or, even better, doesn’t need the funds because they are rolling in scholarship money, you can change the plan beneficiary to another sibling or save it in case your child decides to go graduate school.
Regardless of the state plan you choose, you can apply those funds to any institution in any state. Keep in mind if you prepaid for an in-state Florida school and your child decides they want to go to school in California, your money isn’t going to go very far.
More College Planning Thoughts
The Dawn of the Early College…there’s a movement going on in high schools that is offering students the opportunity to get a jump start on their college education. I’m not talking about Advanced Placement or International Baccalaureate; I’m talking about the first two years of college done. The Early College model is a 5 year program where students graduate with both a high school diploma and associate degree. This is a huge money saver for parents! Paying for two to three years of college versus four or five is a bargain! Keep an eye out on this one.
Don’t knock community college. I never understood the true value of a community college until I had the distinct pleasure of teaching at Northwest Florida State College. There are some real gems out there and they are a great way to get a great value for your dollar as part of a college savings plan. There is no reason your child cannot complete their first year or two at a community college and then transfer to a larger college or university of their choice. Community colleges have amazing perks like smaller class sizes and professors who live to teach (and not to research and pursue tenure). This is a great choice for a child needs to do a little bit more maturing before you let them loose in the world. Keep this in your plans, too.
Not to beat a dead horse (my husband says I keep one in the backyard), but regardless of the choice you make, know that you have to put your present financial situation first. If you have debt, or no savings, or no retirement, or all three, you have got to create a stable foundation in the present before you start grasping for the future.
This is our second reader’s choice topic! Thank you to JK and all the fans that voted for this topic!
Comments
Powered by Facebook Comments
We are looking into this right now for Max. Unfortunately, CA doesn’t have any tax incentives, boo. We just found the saving for college site recently and are sitting down to figure out which plan we’ll be investing in… Luckily Steve’s done paying off his loans and I’m also done too. I completely agree about having the emergency and retirement funds/savings in place before worrying about college. I’m all for helping the little guy with college but I took out loans to cover what my folks couldn’t and that will be good for him too
!
Great feedback! I’m glad to hear that your loans are paid off. As long as you are actively working toward emergency savings and paying down debt, it is fine to set some college money aside at the same time. There are some great lifecycle funds out there that will reallocate your holdings based on how long you have before your LO heads to school. Shoot me an email and I’m glad to share specifics.
This is a fab resource that parents need to bookmark, military or not. To be totally honest with you, 529′s have always sounded so foreign and intimidating. But not if we get serious and really get into it. I’m looking into doing the UPromise thing, actually … ok, well, getting more serious with it. Kids have 15 years left … so that means 15 years to save. Thank you so much for taking the time to write this!! Much rather read it from another milspouse than Suzy Orman LOL
Glad to hear this helped remove some fear! I plan on writing another post that goes a little more in depth about the types of options you have when it comes to investing in different 529 options. Check back for sure! Thanks for taking the time to respond, too!
May totals: Got $1453.79 worth of stuff for $488.89 This is gceeorirs and personal care items for 7 people (two are small children and don’t eat/use much).
Lots of great advice! We actually put our retirement savings ahead of our children’s college funds for that very reason–You have to the highest priorities paid for first. You can always borrow money for college, but not for retirement… Unless major credit card debt counts
. My husband I both paid for college on our own with minimal student debt (borrowing only what we truly needed) which we promptly began paying off at graduation. We have four children and are a single income family so I have no plans of being able to pay 100% of each child”s college education, but we set aside automatically each month for each child so we can help them as much as possible. I think investing in one’s own education can be a great way to take pride in it and learn a little financial responsibility. For me, knowing I was paying for it made me think harder about about which classes I chose to take and put forth maximum effort since it was my dime and I wanted to get my money’s worth!
Thank you for sharing! And NO! NO MAJOR CREDIT CARD DEBT!
Don’t forget about the ability to transfer over the MGIB. I’ll write more on this at a later date!
I think your kids section is great!! As a motehr of five I always love hearing ideas about teaching my children something new. What a great idea to include your kids in learning to save and how to spend. They are our future!! I will be excited what you have to say about saving for a car. My oldest is 14, just right around the corner!
The 529 is so confusing. I had a friend who put a ton of money into a 529 then his kids decided to not go to college. Maybe some day they will.
529′s operate a bit like mutual funds…specifically IRAs. You can still withdraw money at a penalty or you can pass it on to another family member or on to your children’s children if you choose. There’s a school of thought out there that suggests opting out of 529s and choosing to use a Roth IRA instead to avoid the problem of penalties for using your funds for unqualified withdrawals…you can withdraw for educational purposes from a Roth prior to reaching 59.5 (the qualified age for retirement withdrawals).