Wednesday, September 16, 2009

College Savings

If you have one child or more, have you considered the cost of college? It's incredibly expensive now, so just imagine how expensive it's going to be when your child(ren) will be going.

There are two financial debates as it relates to college expenses for children.

1. Is it the parents' responsibility to pay for the costs of their children's college education?

2. Should the parents prioritize their children's education over their retirement?

I fall into the NO and NO camp. S and I are making a conscientious choice to pay for our child's education because we are pretty sure we are on our way to having a solid retirement. If we have leftover money after the bills are paid and we save for retirement, then we think we should save for Julia's future education.

If you are barely making it, then of course your child's education will take a backseat to everyday expenses and your retirement. However, I encourage you to take a look at your expenses to make sure you're trimming your budget as much as you can.

Once we decided that we were going to pay for Julia's education, I looked at each state's 529 plan. While each state sponsors one or more 529 plans, you're not relegated to using the plan that belongs to your state. Particularly with states with income tax, there can be advantages to using your state's plan. Washington doesn't have state income tax & I don't particularly like Washington's plan, so I was happy to compare all of the plans.

529 plans come in two general categories: prepaid tuition (Washington's plan) and plans with investment choices. A 529 plan with investment choices is very similar to a Roth IRA. You put in after-tax money now, and it grows tax-free as long as you use it for an educational purpose & abide by the other withdrawal guidelines. The tax-free compound growth is awesome! Plus, if she doesn't need all of the money for college, we can change the beneficiary on the plan and give it to someone else in the family or use the money for college education when we're older. Yes, S and I both have master's degrees but would like to get more education in our later years.

I analyzed a lot of the 529 plans offered by the various states, and for our situation we picked the Iowa 529 plan. It's handled by Vanguard, which is one of the financial institutions I regard highly. It has relatively low expenses as well. Plus I liked their investment choices.

We've been contributing for about 3 years now. We started before she was even conceived, and I named myself the beneficiary. When she was born, we changed her to be the beneficiary. There are annual gift tax limitations, $13,000 this year, so be prepared if you want to gift something over this amount and spread it over 2 or more years.

A 529 plan is a great way to save for college. Personally I do like the investment plans over the prepaid plans. However, we chose really aggressive investments and are paying the price with a 20% decline in the investments due to the market. We're holding tight despite the losses because we know the market will pick back up at some point. Plus she has 17 years before she will need the money.

I don't have the time to go over all the other great things about 529 plans. However, this website is great and will give you tons of information: www.savingforcollege.com

2 comments:

Scrapping in Circles said...

We have college savings accounts for each of our kids. I agree that the answer to both your questions is no, but I think parents should try to save for their kids' education. There are some families that can't, but many that can and don't. Some people just are really frivolous with their money spending it on new cars every couple years and more electronics than they need.

I was fortunate; my parents saved my whole life and paid for my college tuition. They offered my sister and I each four years at any state university or the equivalent money at any out-of-state or private university/college. (Here's how you'll notice the difference between my sister and I. She went to a very expensive private school. I went to WWU (one of our state universities) and finished my five-year-degree in exactly four.)

On the other hand, my husband had to pay all his own college tuition. It was obviously harder for him, but he was able to have them paid off in three years out-of-college. So, it can be done, but it is nice to not have that debt hanging over your head when you graduate.

Miss J's Mom said...

You guys are doing great! I'm so proud of you, you do so much on one income!