My wife and I had our first child just over a year and a half ago and it’s amazing just how fast that time passes. It seems like just yesterday that our son was born, but now he’s learning words and running all over the house climbing on things he shouldn’t. Watching him grow up so fast, we’ve realized that in no time at all he’ll be graduating high school and thinking about college.
Humorist Dave Barry wrote, “I believe that we parents must encourage our children to become educated, so they can get into a good college that we cannot afford.” If you’re willing to start your college savings process now, that doesn’t have to be the case.
While we’re going to be helping our son pay for his college education, we do believe that he should also take part in paying for his schooling by getting good grades, applying for grants and scholarships, and even getting a part time job while in school. I think it encourages any child to take ownership of their education when they understand the cost, especially when they’re paying for part of it. My parents took this route, and I believe it worked rather well.
Although saving for college, it’s important to address other financial priorities first.
- Getting out of debt: If you’re in debt (besides your mortgage), your first priority should be to get rid of that debt as soon as possible. Use a plan like Dave Ramsey’s 7 Baby Steps to dump your debt. Getting rid of that debt will help set a good example for your child and set them off on the right path after they graduate. Not to mention, it will make the rest of your financial goals that much easier.
- Saving an emergency fund: Life has a way of sneaking up behind you and knocking you to the ground. Plan ahead with a 3-6 month emergency fund so that you don’t end up in debt when the unexpected happens.
- Funding retirement: I recommend saving for your own retirement before paying for your kid’s education. Make sure you’re saving at least 15% of your income towards retirement so your kids don’t have to take care of you in your old age.
How Much Does College Cost?
Before we discuss how and where to save for college, your first consideration should be: How much does college cost? It varies depending on what school you go to, whether it’s public or private, in-state or out-state. From FinAid.org:
“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.”
That’s already expensive; but if you want to figure out how these prices will be in 18 years, check out this college cost calculator.
Good Ways To Save For Your Kid’s Education
When you’ve decided that you want to start saving for your kid’s college tuition, you next need to decide where you want to save the money.
We took some classes given by financial guru Dave Ramsey, and he talks at length about some ways to fund your kid’s college costs. Among his favorites are ESAs and 529s. One of my favorites is the Roth IRA.
- Education Savings Account (ESA): You can contribute up to $2,000 per year after tax to an ESA. The money will grow tax-free! If the money is used for something other than education, there is a 10% penalty as well as taxes due. If the child ends up not going to college, the money must be used or rolled over to a qualifying family member by age 30 or the same 10% penalty applies. There are income restrictions for this plan, with singles over $110,000 and married couples over $220,000 not being eligible.
- 529 Plan: 529 plans are another option if you make too much money for an ESA, or if you want to invest more money above and beyond the ESA’s restrictions. You can save up to $12,000 per year, per child with a 529 plan. As with the ESA, money must be used for education or there is a 10% penalty and taxes due.
- Roth IRA: Another attractive option is to use a Roth IRA for college savings. It has great benefits, like that the money isn’t factored into the equation when applying for financial aid, and there are no penalties for using the funds for something other than education. Also, if the child decides not to go to college, you can still use the money for retirement.
How Not To Save For Your Child’s Education
The three options above are just that: options. There are a ton of others as well, such as:
- Insurance products
- Savings bonds
- Zero-coupon bonds
- Pre-paid college tuition
While these options aren’t bad, they tend to lead to relatively smaller returns than an ESA, 529, or Roth IRA, which is why I wouldn’t recommend them. But whatever method you use, the worst thing you can do is to not save. Choose wisely (but choose something!).
Education is so important these days, and we all want our children to get the best college experience available. In order to make that a reality it’s important to start saving while your child is still young – costs are skyrocketing. Find a good ESA, 529 or Roth IRA that you can save your money in, and start stashing cash as often as you can. When the time comes, the only decision your child will have to make is which university they want to attend!
How are you saving for your child’s future education? What options did you consider, and what made you settle on one in particular. Feel free to discuss your experience in our comments section below.
Peter Anderson is the publisher and head writer for the Christian personal finance blog Bible Money Matters. Pete has been writing about financial topics since early 2008, and has a passion for helping people to make better decisions with their money. He has a Bachelor of Arts degree in Communications from the University of Minnesota, and he loves playing board games and collecting cash back from PerkStreet! You can find him most days on Facebook, Twitter or Google Plus. Read more of Pete’s great financial advice at Bible Money Matters.