One of the most noble things parents can do is saving for children’s college education. This post is in continuation of the personal finance checklist series.
First and foremost, the personal finance checklist is a prioritized checklist – items are listed in the right pecking order when it comes to personal finance according to my conviction.
If you are a parent, an important thing to note is that one can borrow to go to college, however, one can’t borrow for retirement.
So, ensure that you have your retirement planning done before you look into saving for college education.
Most parents parents I talked to want to support their child’s college education, however, they keep procrastinating to save.
Time flies, kids are in high school preparing for PSAT and SAT, and suddenly parents realize they need to start saving for college.
If you plan to support your child’s college education, the sooner you start the better. Leverage the power of compounding and make your money work for you.
However, I will save this, better start late than never.
Every dime matters – start saving as early as possible.
Okay, enough said!
You have decided to save for your child’s college education.
What is the right instrument available to save for college? Let’s explore!
Saving for College Education
The 529 college savings plan is the most straight forward way to save for college education.
Every state in the US offers a 529 plan. You can save using any state’s plan and use that money to fund your child’s college education in any state.
The after tax money that you invest in a 529 plan grows tax free and can be withdrawn tax free for all qualifying educational expenses as defined by the IRS.
If you are not familiar with it, please read 529 College Savings Plan Overview.
Once you read the overview and get the big picture, you might also be interested in the top 529 college savings plans – where I provide an overview of the top 4 Morningstar gold rated college saving plans and things to consider when choosing a college savings plan.
Talk to Children About Going to College
Best thing for you to do as a parent is to talk to your children about going to college from a young age.
This instills two things – (1) your belief and (2) your expectation from your children.
I am not a psychologist.
However, I know this much – my father always believed in me and had high expectations from me.
This had a tremendous impact in me and I certainly lived up to it.
Today, my 10 year old kiddo knows that she needs to go to college and understands the importance and value of education.
The usual argument for not going to college is to point to a CEO of a certain company and say he or she didn’t go to college.
Yes that may be true for that one or a hand few people.
However, a vast majority of people have done a lot better with a college degree than those without.
You might be interested in reading Should I go to college? – this is a good topic to discuss with your kid.
How Much Should You Spend On a College Degree?
When you talk to your kids about the importance of going to college, it is also equally important to know how much it is going to cost.
One of the first personal finance decisions your kid will most likely make is how much to spend on a college degree.
It is important to objectively look at it and help your child navigate that decision.
A talking point with your kid – What percentage of college education costs are you planning to support as a parent? How much do you expect your kid to be responsible for – aka student loans?
This kind of open conversation will help set the right expectations both for your child and for you as a parent.
You don’t want your kid to assume you are going to pay for 100% of the college education if that wasn’t going to be the case.
529 College Savings Plan Alternative
Are there ways to save outside of the 529 college savings plan?
Yes, there is.
The main draw back of a 529 plan is that if you withdraw money for any reasons besides education, you are hit with taxes and a 10% penalty on capital gains.
Let me be clear, 529 is the most straight forward way to save for college regardless of this drawback.
If and only if you are saving adequately for your retirement in a 401k or similar retirement savings account, you have done your retirement planning in place, and you don’t need to rely on an IRA for your retirement needs, then you could consider investing in an IRA as an alternative to 529 college savings plan.
You might be wondering – what are you doing Michael?
Sarah and I have been saving for the past several years through a non-traditional (Variable Universal Insurance) route.
Long story short, a financial advisor, got both Sarah and I to sign up for a Variable Universal Life insurance, back in the day, when I didn’t know any better.
It has extremely high surrender fees. So, we didn’t want to surrender and lose money.
I got creative, did some damage control, and decided to hold on to it until surrender charges come down to “zero”.
We decided that the money being saved in that account would be for kid’s college education.
I can’t blame anyone else but myself for signing up to something that I didn’t fully understand.
That is when I started taking matters into my own hands and became a DIY personal finance dude.
The good news is that we have been saving, the bad news, we didn’t use a 529.
It was my goal to start investing in a 529 plan this year.
I am glad that I made it a priority and started it as of Sep 2016.
We chose to go with the Utah Educational Savings Plan – if you want to know why, please read top 529 college savings plans.
Do you use a 529 to save for your child’s college education? Do you talk to your children about the importance and value of education? Do you have open money conversations with your children on what college expenses you would pay for and what you expect them to pay by themselves?