Saving for College Education

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.

 

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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The after tax money that you invest in a 529 plan grows tax free and can be withdrawn tax free for all qualifying educational expenses as defined by the IRS.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.

 

Conclusion

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.

 


Side Story:

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?

 

 

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16 thoughts on “Saving for College Education”

  1. I don’t have kids yet but I hope to one day. When I do I would love to help them pay for at least half of their college education. Student loans have been a huge drag for my wife and I, but I don’t think it’s all bad. It’s made me incredibly motivated to side hustle and I’m not sure I would have been as motivated if not for our student loan debt.

    1. Welcome back, DC!

      Sometimes the set backs we have in life get us really motivated to do above and beyond what we would normally do otherwise. In my case, the huge pile of credit card debt motivated me to not only get out of debt, but also take complete control of my finances. I am not sure if I would be where I am today, had it not been for the set back with credit card debt that I had early on in life.

      –Michael

  2. My wife and I set up a 529 for my son as soon as he was born and we regularly put in contributions so we feel confident he will be able to go to the school of his choice.

    One of the things that I’ve heard recently is that some people when they find out they are expecting actually create a 529 in their parents name and then transfer it to the child when they are born. There is supposedly a loophole that allows for this. Anyway for those people that plan to have children in the future this may be a good way to save extra $$$

    1. That’s awesome, MSM! Yes, that is an excellent point you bring up. You can start the 529 plan in your name and transfer it to your child or your grand child. The sooner you start saving into a 529, the better it is.

      –Michael

  3. We set up 529 plans for both of our kids when they were young. We’ve saved enough to help out, but certainly not even close to enough to cover four years. We use our state’s 529 plan (Iowa) because contributions are tax deductible (and it’s a good plan). The 529 is a great savings vehicle for college, in my opinion!

    1. Hi Amanda,

      Yes, I agree with you, I am not aware of any savings vehicle that is as good as 529 when it comes to saving for college education. That is great that you have saved enough to help out. It is nice that you are taking advantage of the tax deductible provision in your state. Have you come up with a plan or discussed with your kids with regards to what expenses you may or may not be able to cover?

      –Michael

    1. Hi Santanu,

      Welcome to Stretch A Dime!

      I ‘m glad that you found the post useful. Hope to see you more here.

      –Michael

  4. I believe speaking with your children about your college saving plans as early as possible is so important. It gives them a clear understanding of what help they can except. Talking to them about the overall cost and career options as they get close to college is important too. You want them to understand the ROI of the college degree.

    1. Welcome back, Brian! Yes, those are all great points. The soon we have the conversation the better. As you pointed, we need to help children understand the ROI of the college degree before making the spending decision.

      –Michael

  5. Inspired. I think anyone who saves for the children’s future deserves a medal. In the UK we don’t have plans specifically for further education, instead students borrow huge amounts throw student loans to get them through their years there, and end up spending years paying off the debt. My family have always been savers and my parents saved for both my sister and I so we had a pot of money in our late teens, which was very useful. Brilliant incentives here to save for your children

    Enjoy the journey!

    1. Hi Mandy,

      It is nice to hear that your parents were savers and also deposited some fine financial acumen into you. These days the student loans seem to as large as a home mortgage loan and it seems like forever for many people to pay them off. Parental help on college education certainly goes a long way in helping kids.

      –Michael

  6. Making a plan for college is SO important. We have several steps in place for our kids to help them avoid student loan debt as much as possible. We’ve all heard the devastating student loan debt averages now – no excuses!

    1. Thanks Laurie! It is nice to hear that you have taken good measures to save for college education. You are right about the “No Excuses” part – we need to plan ahead financially for college, and the sooner we do it, the better.

      –Michael

  7. Hi Michael – I agree that investing in our kids’ future is important however I’ve had a slightly different approach to it.
    As you mentioned, the 529 funding is restricted to education costs only and the investments inside the 529 depend on which state you are investing in. I’m really not a big fan of locking my money away in an account that earmarks it for specific purposes only.
    The main reason for me is that I really want my kids to have an international higher education and the 529 plans will likely not be of any help. It’s also equity that could be invested for the parents in other ventures with better returns than stocks (let’s say real-estate rentals or starting a business).
    I wrote a post on this a few weeks back to explain my line of thought.
    Otherwise, I think the 529 plan is definitely a great option for many many people who didn’t think about investing before!

    1. Hi TheMoneyMine,

      Welcome to Stretch A Dime!

      I had the same concerns that you did about locking the money into an account that earmarks for specific purposes.

      Your point with regards to international education is very valid. However, after giving it a lot of thought, I decided to go ahead.

      The worst case down side is you pull the money out for non educational purposes – in that case you get hit with taxes on capital gains and a 10% penalty on the capital gains. If the money is not fully used for kids, in the event of international education, it could be transferred to grand kids.

      As you point out, real estate rentals is a good means to good returns if you know how to go about it.

      Hope to see you more here.

      –Michael

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