College is not free. In fact, it’s a big expense. Luckily for you, you have around eighteen years to plan for this expense! That wasn’t all that encouraging still, right? But think about it. This isn’t like a hospital bill that comes up unexpectedly or your vehicle’s water pump going out the day after your warranty expired. Nope. You have about 18 years to plan for this expense. Does this mean that everyone is going to plan for it? Not likely! Just look at retirement planning. People have 45 years to plan for that, and they don’t. Ultimately, your child will need to decide if they are going to attend college and how they will pay for it. As a parent, your responsibility lies with teaching your children about the benefits of a college education and how to complete college debt-free.
Is College Needed?
Most people today with a college education make more money than those with just a high-school degree. Of course, this isn’t always the case. Look at some of the wealthiest people in America. Some of them never made it out of college. Some careers require a college education—doctors, lawyers, and teachers come to mind—but there are lots of high-paying professions that only require an associate degree or do not even require any formal education: plumbers, software developers, and almost any type of sales. Your kids do not need to go to college to win in life or to win with money.
How Much to Save
Everyone needs to decide how much, if any, they plan on helping with their children’s education. Many parents would love it if they could pay at least some of their children’s college education so their children can complete their education with no debt; however, most of those parents are not in a position to save for their children’s education, because the parents are saddled with debt! Parents can’t seem to find $100 a month to save, even when they have a college education. Chew on that for a minute. Now, if you are following this blog and are on step 5, you are smart enough to be debt-free and are able to save, whether you have a college degree or not. There are a few things you need to do to help your children with their college expense. Determine how much you will save for your children’s education, and then teach your children that they don’t have to live with debt. They can have a debt-free college education if they choose to. Teaching them requires you to talk to them and requires you to set an example in your daily lives by living within your means.
Steps 4, 5, and 6 of this plan are done at the same time. For step 4 you should have 15% of your income going to retirement accounts. Step 5 is when you save money for your kids’ college. Some people do not have kids, and even if you do have children it’s acceptable to not save for your children’s college education, so this step is optional.
How much should you save for each child you have? Colleges and majors can have different costs. Determine how much you will want to save for each of your children and start saving. If you save $100 a month from the time your baby is born until they are 18 years old and can get a 10% rate of return, you will have almost $55,000. In today’s dollars (anticipated 3% inflation), that’s around $40,000. That might be enough for four years of in-state college tuition for one of your children. If you start this step when your child is nine years old, you will need to invest about $240 a month to have that amount in today’s dollars when your child is ready for college.
There are a few tax-advantage options for saving for college. One option is a 529 savings plan. I stress savings plan as opposed to a prepaid tuition plan. Go with the savings plan. The main advantage of this plan is that earnings grow tax-free. The contributions to a 529 plan are not tax-deductible, but the earnings are tax-free when used in accordance with the plan. This makes the plan behave just like a ROTH IRA or ROTH 401(k) with regards to when you pay taxes. Each state sets up its own plan, and you can participate in any state’s plan.
Another option is a Coverdell Education Savings Account, or just an Education Savings Account, or ESA. All these refer to the same plan. The tax benefits of an ESA are the same as a 529 plan. The advantage of an ESA is that you can invest the money in stocks, bonds, and mutual funds. You are in control of what you invest in. One downside is that there are income and contribution limits to an ESA.
As of now, both the 529 and ESA plans can be used for college, high-school, and elementary education tuition and expenses. As with everything governed by the IRS, rules can change, so make sure you understand the latest rules if you are going to use either of these plans.
Other Ways to Pay for College
Some of you have kids who are in high school already and don’t have 10 or 18 years to save for college, so these savings plans won’t be too much of an advantage to you, and you need to look at other options. Other ways to pay for college include scholarships and working, and these options are available even if you have some money saved for college. Working during high school and college to earn some money for college is good to do, but applying for scholarships is a way to rake it in. There are all kinds of scholarships out there! Just think of this: if your child can receive a $1000 scholarship for even 40 hours of effort, that’s $25/hour! Even if it’s “only” a $500 scholarship it’s still $12.5/hour. Your child’s goal should be to apply for a scholarship every week during their last year of high school.
Saving money for your children’s college education can help them have a debt-free college education. A debt-free college education starts way before they are 18. It starts with your teaching them how to handle money, teaching them how to live within their means and to be debt-free, and showing them a good example of how you are handling your money. If you want, save some money for your kids’ college, but that’s up to you to decide. There are some tax-advantage options for you. For sure you should teach your kids the value there is in getting good grades and maybe playing sports or music or drama club. Add in some work, too. All of this can pay dividends when applying for scholarships.
It’s going to ultimately be up to your kids on how they pay for their school, but you get them for the first 18 years, so you get to have a lot of input on forming their behaviors and decisions. Make it count. Set them on a path to complete college debt-free.