If you have children, this is the step in your financial journey where I’d recommend you start putting away money to pay for their college education.
That is, of course, if you actually want to save money for this purpose.
Before we get into any details on this step, I think it’s important for all of you parents out there to ask yourself a tough question:
Do we really want to save for our children’s college education?
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If the answer is yes, then that’s great and you can move on with the rest of this lesson.
However, I want you to know that despite all of the pressure you may feel from society and perhaps your parenting peers, you do NOT have to save for your kids’ college expenses. There is no parenting law that says your kids must get a Degree in Finance on your dime.
While I think it’s a cool thing to do if you are able and desire it, I think too many people assume that college savings is a firm responsibility of all parents, sometimes to the point of stupidity (more on that below).
Personally, I had absolutely no help from my parents in this area, but I was able to get great undergraduate and Master’s degrees in engineering with no student loan debt.
How? It required scholarships and a lot of hard work during my college years, along with some practical choices in my college selection and lifestyle, but I made it. And to be honest, I think the need to work hard has been one of the best things that happened in my development into adulthood.
So for Bethany and me, we are saving some money for our kids’ college education, but it’s not guaranteed for them and it certainly won’t cover the entire cost. They can earn their own higher education should they choose to go that route.
There’s a Reason This is Step 7
So for those of you who want to put away some cash for college, my main point is to put this investment into proper perspective.
I have actually heard from couples who proudly put money away every month for college savings while they literally couldn’t make the minimum monthly payments on their debts. This is simply stupid!
Saving for college is absolutely optional, and there will be other ways for your kids to attend if you don’t have their entire tuition bill set aside when they matriculate. However, your family’s current ability to deal with a financial emergency and your own retirement funding is not optional, and you will have far fewer options available to you if you don’t adequately prepare in these areas.
Unless you like the idea of living in a van down by the river and perhaps eating dog food when you’re 70 years old, it’s essential that you keep college investing firmly in Step 7.
That means your debt pay down, emergency fund and retirement savings should all be happening in full force before you start putting aside money for this purpose.
In my opinion, that’s where this should be placed among your major financial priorities.
How Much & Where to Invest
Unfortunately, the question of how much to save for college education is not easy to answer because it varies so greatly for each individual situation.
Some variables that will impact your decision are the amount of time until you need the money, the type and location (private vs. public, in-state vs. out-of-state) of college you are anticipating, the portion of the total costs you will be covering, scholarships and loans expected, etc.
For some guidance on how much to save in your individual situation, I’d recommend you check out this great online calculator: World’s Simplest College Cost Calculator
Once you know how much you need to save monthly to reach your goals (and you’ve regained consciousness), you’ll need to decide where to invest your money to get the required returns. While I am not going to give specific investment advice (I’m no financial professional), I will encourage you to check out the options available that provide you with a tax break on your contributions.
The two primary vehicles for tax-advantaged savings accounts are Coverdell Education Savings Accounts and 529 Qualified Tuition Programs.
For most families, a good 529 plan will meet their college savings needs, but I’d encourage you to read more about the different options available.
If you decide to look into a 529 plan, you should know these basics:
- They are state sponsored, but your money can be used in any state.
- You contribute to the 529 account with after-tax money
- You can withdraw from your account for qualified education expenses without paying any tax on your investment growth
- If you use the 529 plan offered by your home state, you’ll likely get a break on the state income taxes on your contributions
- You can choose to contribute to any state’s plan, and a good plan out-of-state will likely outperform a bad plan in your home state, even though you’ll miss out on the state income tax breaks.
For more specifics and some excellent resources to help you choose the right plan for your family, I encourage you to visit Saving For College and use their thorough research tools.
Let’s Talk About College Funding
As you can tell from the introduction to this post, I don’t buy into the assumption that you need to put your other financial responsibilities behind investing for college. I’d love to hear your thoughts on this topic in the comments below.
Do you plan to pay for your kids’ college? If so, how do you plan to pull it off?
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I think it this is good advice to determine your priorities and to understand what’s optional and what isn’t. Becoming a burden to our children isn’t a great choice. That said, I plan to save for my children’s education, even though I paid for most of my own. I’m not convinced a high-cost private college is any more important than a strong state school that excels in their interest area.
Well said, Lori. I agree that becoming a financial burden on our children because we didn’t take care of ourselves first can be a big problem. And I definitely agree that a private education seems to offer little advantage outside of a few careers where the pedigree enters the equation in a major way.
Thank you. I am glad to see that others agree that as parents, we are not obligated to pay for our children’s higher education. My husband and I aren’t planning on saving up money to send our children off to school. I had to pay for my education (which unfortunately included loans for me, but they are on the way to being taken care of) and my husband’s was paid for totally by his mother. He felt that he didn’t appreciate his education as much having had it given to him as opposed to working for it himself. We will encourage our children to not take loans and to work for it themselves. Not to say that we aren’t going to help them out a bit in college (finance visits home, send them a bit of money or gift cards for things they need, but we aren’t going to outright pay for it.)
Thank you for this blog. I happened upon the other day and was very impressed by it. So much so, I had to put your button on mine. Thank you!
Thanks for sharing your insights, Crissyanna. It’s always interesting to hear how different experiences with this topic generate different plans of action for our own children.
And thanks so much for adding the EM button over at Created for Home!
While I agree that parents should not pay for college if they cannot afford it, I hate that in some circles it is looked DOWN upon (even within our friends who have student loans) to have parents pay for their college. My husband and I were blessed enough to have our parents support through our college educations, and we realize how huge that is. We are also starting our marriage debt free and able to enjoy so many things that we would not be able to if we had debt. Again, it’s a choice each parent has to make, but don’t overlook the blessing it is to your child to help them out starting their adult life with a good education. While we don’t have children yet, it will definitely be a priority to save for their college!
Excellent point, Jena. It was probably out of a bit of spite and jealousy, but I know I resented some college friends who had parents that paid for everything. While I was working 25 hours per week on top of tons of school work, they got to coast through and seemingly take it easy. I have tried hard to not carry that forward into our own parenthood, though, and I can now see what a blessing it is if you are willing and able to pay for your kids’ higher education.
The Coverdell program has income restrictions and is for all intents and purposes on the way out. The 529 account is what you need to mention to your financial advisor. The advantage in using a 529 account isn’t so much any tax break YOU receive, but the earnings growth you are expecting will receive a tax advantage; this means the money can grow free of Uncle Sam asking for his share. The things to watch out for are contribution limits and the realization that these funds are going to have to be distributed to an approved academic institution. While the definition of “approve institution” may vary, it will come into play. Penalties may be incurred if these guidelines aren’t watched.
Additional itmes for your consideration concerning 529 accounts should include both your retirement palnning and the reality that 529 accounts aren’t just for kids; plan for your retirement years in style by adding a 529 accoount for your own adult education needs. Take cooking classes through an “approved institution”! Train for a new part-time retirement career doing something you love! Be creative and remember that an adult life lived learning is an adult life worth living. But always remember, savings is what happens as a habit. Make you realistic monthly budget work to its best; but the money will always only go so far. If you are saving for future educational expenses AND your retirement, take time to evaluate priorities and alternate funding sources. After all, we have all seen college loans and grants, but when was the last time you saw a retirement loan? (I won’t even discuss reverse mortgages so don’t bring them up!)
Many insurance companies and mutual fund companies assemble pre-packaged, age-specific programs to meet your family’s needs. Someone who begins the college savings process very early in their child’s life need not be too aggressive and may be able to put away smaller amounts each month (more time until college equals smaller payments). However, someone who begins the college savings process relatively late in their child’s academic career (age 10 and up) will need to put away more and be aggressive to a somewhat higher degree to make the plan work effectively.
I have seen Franklin Templeton’s program work well, as well as John Hancock’s. Both companies offer age-based investment strategies. Both companies offer really cool additional incentives; both offer “birthday clubs”, where you can have cards automatically sent to family and friends that inform them that your child’s birthday is coming and that they can contribute directly to their college savings account… How cool is that?!?
Thanks so much, Scott! It’s awesome to hear from a financial professional on this important topic. Thanks for sharing your wisdom and experiences. 🙂
@Jena I agree with your comments.
It’s nice if you can get scholarships and pay for college with little to no debt, but I think many can’t do that and either need to do it with help through loans and other means or help from parents or others.
I also agree with this idea that it’s not good to sacrifice your financial situation for contributing to other things, but there’s not a set time to contribute to your kid’s college or anything else. If time is needed to get finances in order, definitely do that first, but if you choose to help your child with their college on down the road so be it.
Another thing to consider if you do save for college is that tuition and fees go up every year so what college will cost in 10-20 years will be different than what it is now.
Thanks for the article and comments!
Thanks, Nate. You raise some good points and I appreciate your perspective!
I went to community college for two years, then took some time off to work full time and finished at a state university. My parents gave me a certain amount per course and then I paid for all my own tuition bills with it. They didn’t care what kind of school I went to, but the understanding was that I would be able to have it covered if I went to state schools, etc.
In the beginning, I ended up with extra money left over because the community college was really cheap. As fees went up though, I had to dip into some of my own money to pay the bills. I did work 20-30 hours a week while I went to school though, and I took five years to graduate. I lived at home almost the whole time. I am lucky that I get along with my parents and I graduated with no debt and extra money in the bank.
I thought for a little bit about going to grad school, but decided against it because what I want to do doesn’t really require it and would just leave me with more bills.
That’s a great story, Carolyn. I think you provide a wonderful example of being able to meet your education goals with going into student loan debt by making smart choices. In your case, it sounds like your parents provided some support but left you to be responsible for your own decisions, including part-time work. Well done! 🙂
Nice story.
Among my circle, people generally pay for their kids’ college educations. HOWEVER, with the economy the way it is, things have certainly changed. In-state schools are becoming more popular as they are more affordable, and often, the investment is now shared with children. Some who sought to pay for their kids now find themselves unemployed and dipping into savings. It is a hard question… and will change as kids get older and circumstances change.
Sarah
Among my friends, everyone had to pay for their own university tuition and work for it. I never expected my own parents to pay for mine (they didn’t have the means to).