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
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)
- Tuition and Fees: cost of instruction and campus programs for students
- 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, theNational 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.