My wife Maria and I found out that we were going to be parents back at the end of 2009. At the time we weren’t completely sure that we’d be able to have children because of a variety of health scares that my wife had been through, but were so happy and blessed to find that we’d be having a baby boy.
Fast forward 3 years and here we are with a 2 and a half year old toddler running around the house, and we’re finally getting back onto a normal sleep schedule. It’s hard to believe how fast time has passed, and it’s scary to think that in a short time he’ll be starting school already. We know we need to think about saving for his college education costs, which we haven’t really done so far.
So today I thought I’d take a look at some of the options for saving for a college education.
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Retirement Before College
One thing that I’ve learned over the years is that while you can borrow money to pay for some of your schooling, you can’t really borrow money in order to pay for your retirement. Because of that I think it’s important for parents to pay for their own retirement savings before paying for college. You don’t want to saddle your kids with the need to take care of you when you’re older, right?
With that said, we do want to help our son out to some degree, but also think that it’s important for him to help pay for his own schooling as well, through good grades, through choosing an affordable school and through part time work if necessary. If needed a few small loans might not be the end of the world.
So there are things I’d recommend doing before saving for college costs.
- Dump any debt: I’d first recommend getting rid of any non-mortgage debt as fast as you can. Use a debt reduction program of your choice, and knock it out ASAP!
- Build up an emergency fund: Make sure to save at least 3-6 months of expenses, or more, and protect yourself against everyday emergencies that come up.
- Funding retirement: Fund your retirement and save at least 15% of your income.
Once you’ve done those things it is usually OK to consider saving for your kids college as well.
The Cost Of A University Degree
The cost of college is going to vary pretty widely depending on factors like which school you go to, whether it’s an in state school or not, what your major is, private versus public and so on. But to get a general idea on what college costs these days, here’s what FinAid.org found as far as what a university education costs.
According to the College Board’s Trends in College Pricing, the 2011-2012 average total costs (including tuition, fees, room and board) were $17,131 for students attending four-year public colleges and universities in-state and $29,657 out-of-state, and $38,589 for students at four-year private colleges and universities
Ok, so college right now costs on average anywhere from $17,000-$39,000. I don’t even want to think about what it will cost in 16 years from now, but this college cost calculator can give you an idea. Here’s a hint. It’s a lot of money.
Different Ways To Save For College
When deciding how to save for college, there are a few different recognized savings plans specifically for college costs that you can use, and a couple of non-traditional ways to save.
Here are the main ways to save for college costs that I would recommend.
- Education Savings Account (ESA): An ESA will allow you to contribute up to $2,000/year after tax, and the money will grow tax free. The money can only be used for education. If it is used to pay for things other than qualified education costs there may be a 10% penalty in addition to any taxes due. If your child doesn’t go to college, the money can be rolled over to a qualifying family member before age 30, otherwise the penalties may still apply. ESAs have income restrictions, with singles over $110,000 and married couples over $220,000 not being eligible to contribute.
- 529 Plan: If you aren’t able to contribute to an ESA, or you want to contribute more after ESA is exhausted, a 529 plan may be a good option. There is a limit of saving $12,000/year, for each child. Money in a 529 plan has to be used for qualified education costs, or there will be a ten percent penalty and taxes due.
- Roth IRA: Some people will also use a Roth IRA for education savings. Reasons people will do this include the fact that money in a Roth IRA isn’t factored into the financial aid equation (cause it’s technically retirement money), and there isn’t the requirement to use the money to cover education costs. There is also the fact that if your kid doesn’t go on to a post-secondary education, you can just keep the money in your retirement account.
Education Is Important. Start Saving.
The cost of a college education is high, and the costs are rising every year. While it can be up for debate as to whether a college education is worth what it used to be, it still pays to get an education in my opinion. The question is, how do you save for those costs? Whether it is in an ESA, a 529 plan or in a Roth IRA, there are a plenty of decent and tax advantaged ways to save for university costs. The only issues you’ll need to decide is just how much you want to pay for and save for your kids, and how much you want them to be responsible for themselves. It isn’t an easy decision, and it’s one we’re working through ourselves right now.
Did you have your education costs paid for, and how did your parents save? Are you planning on saving for your child’s education, and how do you plan on saving for it?
I think the cost of education is rising so drastically nowadays partly because of how easy it is to get a student loan. To me it is akin to the mortgage loan bubble and I do believe it eventually will crash. The amount of students nowadays with over $100K in student loans is insane. I know several people who have close to $200K in student loans. Will they be able to pay it back? Who knows. But the cost of education in the last year has not kept in line with household income mainly because it is so easy to get a student loan and I don’t believe financials are considered. How can you loan $50K to someone who may or may not even have a job after graduation? The government is basically funding our college students education through loans and they may not ever get the money back. It’s a scary thought seeing how much are country is already in debt.
I think the good news is that this will probably eventually work itself out by the time my 1 year old is college-age. There is already a growing rage in CA about how much prices have increased in the last few years and if the voters don’t approve a tax increase (I hope they vote against any new tax), the fees will skyrocket even more. Eventually this hits a point were people are unwilling to go to college or it’s only affordable by the rich. Demonstrations and anger will continue.
Here is a good post (with charts) about how student loans have grown 550% percent in the last 10 years: http://www.doctorhousingbubble.com/brewing-bubble-in-higher-education-college-debt-now-7-5-percent-of-all-household-debt-increase-of-500-percent-student-debt/
I agree about how college costs are growing way out of proportion in relation the costs of just about everything else. It is unsustainable, and to be honest for a lot of people it really doesn’t make sense to go to college. I think more people ought to be looking at vocational schools and 2 year degrees instead of building up a huge amount of debt that will take forever to pay off.
This is something I need to start thinking about soon because I want to start saving as soon as our daughter is born. There are so many tax friendly accounts for college and I hate hearing about people who don’t use them.
My advice is to stay away from the student loan bubble. The rate tuition is growing is unsustainable. You can get a great education without a degree. Our senior engineer barely made it out of high school.
I’ve been thinking more and more about helping my kids start their own business instead of sending them to college. Many kids rack up huge debt in college and still have no idea what they want to do in life, or they get a job that pays so low that it’ll take them 10 years to pay off. I want to equip my kids to be entrepreneurs who can provide for themselves from the get-go. And if they want to go to college, they can do it when they’re really serious about it and have the money to pay for it.
It took me 20 years to get a 4 year degree! I went to night school and worked every day and graduated with NO debt! My parents couldn’t help me at all. I am not opposed to parents helping their children if they have the means to do so. But, I think it is the student’s responsibility to educate themselves to whatever level is necessary for the career path they have chosen. I put forth the effort because I had a goal of having this level of education. We talk a lot about personal responsibility and yet, as parents, we do everything we possibly can to undermine it. So, mom and dad, go ahead and prepare for your retirement. Let your children become adults 4 years earlier. You raised them right so allow them the opportunity to use the decision-making skills you have taught them. It will work out great for all involved!
My parents could not help me pay for college at all – they couldn’t even co-sign on a loan for me had they wanted to. I wanted to go to a very expensive art and graphic design school, but instead had to settle for community college which I paid for through working full-time while being a full-time student. Looking back now, I am glad I didn’t go to the expensive school – most of the things I would have learned then are so outdated now and I’ve learned the art of “self teaching” myself nearly everything through books and online classes.
For my kids, they will probably be on their own paying for college if they wish to go and I will probably encourage them to go to vocational/community colleges instead of the traditional 4 years if their interests allow for it. My 5 year old told me yesterday she wants to be an artist when she grows up – if that’s the case I think she can do that without a college degree hopefully :)
I agree with you that you should save for retirement before helping out your kids. They also have a longer time horizon for paying back the loans, as well as the fact that student loans often have great interest rates.