Starting a College Fund
Saving for college is one of the best gifts we can give to our children. Sending them off to college with at least a portion of costs taken care of can keep them from starting life out in debt or worse, dropping out for lack of funds.
Before you begin saving for your children’s future education, it is important to have your own financial ducks in a row. Just like in Dave Ramsey’s baby steps, college savings is to be taken care of after you take care of your own finances. Set up your emergency fund, pay off your debts, and fund your retirement accounts before you start to contribute to a college savings plan. When you are comfortable with your financial situation, you can start planning. You can also start saving for college even if you have debt or other financial issues you are working on; but don’t fund the college account and neglect your debt or retirement account to do so.
Knowing how much to save is important; there are a number of calculators you can use to determine what the cost of college will most likely be when your kids enroll. I like the College Costs Calculator at Saving for College, it is very easy to use. With a general idea of future tuition costs, you’ll need to decide what percentage you want to pay for. We are shooting for 100% with our kids, but even 25-50% would be a great help. Any little bit you can save for your kids will grow over the years and even small monthly contributions can add up to big amounts come college time.
There are a number of college savings vehicles to choose from. While there is no right or wrong for everyone (we are all individuals with unique financial needs), my favorite and the favorite of many people is the 529 plan.You can read a full definition of the 529 Savings Plan at Wikipedia.
Opening a 529 plan is not as difficult as it may sound. Depending on the plan(s) you choose, you can receive tax deductions, Upromise contributions (this is my favorite thing ever!) and other perks. Comparing 529 Plans is easy too, you can go to Saving For College for a complete list of plans along with all the information to make a proper comparison.
There are, of course, other options than the 529. Regular bank savings accounts, the Coverdell ESA, savings bonds, and IRAs are all options. Each have their own benefits; but in my opinion the 529 is the best choice for college savings.
Here’s why I am partial to our 529 plans:
We use the Iowa State 529 plan, even though we don’t live in Iowa.
Why? Our state plan doesn’t offer a tax break and the plan costs were too high as well. Iowa’s plan is low cost, easy to set up and links to our Upromise account. Upromise makes a quarterly deposit into the accounts automatically.
The account is accessible online and also anyone can contribute. Meaning, Grandma can send money to the college fund instead of sending an enormous chocolate bunny for Easter(let’s be honest, she’ll send the bunny anyway).
I like that the minimum contribution is only $25($15 for automatic payroll deposits), and that we can send in whatever we want. The maximum amount allowable differs for every plan, for us it is $320,000 total in each account. That is a lot of money, what if my kids get a scholarship? The money in a 529 plan can be transferred to a younger sibling if need be, so you don’t have to worry about what happens when your kids get scholarships or grants.
I like the funds that are available in the Iowa plan, I like that they offer an age based plan that is more aggressive the younger the child and slowly starts to get more conservative as you approach college. Therefore, you have more potential growth without having to pick and choose individual investments(something I try to avoid).
The bottom line? You CAN start saving for college, it’s not as overwhelming a task as it sometimes seems.
What is your experience with college savings? Do you have a 529 plan? Share your thoughts in the comments!
Topics: Finance & Money, Life & Family |
March 4th, 2008
Our kids each have two 529 plans–one that we started with our financial advisor, and one that is through Upromise. Probably not the most efficient way to do it, but I’m too lazy to change it now.
We aren’t able to put much into it each year, but every little bit will help for them when they get to college.
March 4th, 2008
Minnemom- I agree, every little bit helps!
March 4th, 2008
We also use the Iowa plan for Upromise contributions. We also have many others, my favorite being the Ohio plan for access to low-cost Vanguard index funds.
March 4th, 2008
MDP-
I should look into the Ohio plan, we started with the Iowa and LOVE it, so I have been hesitant to test any other plans out. I know there are a lot of good ones out there!
Take Care
LJ
March 5th, 2008
I’m not really sure I’m going to go with the 529 plan because my understanding is its for education use only. I would prefer to open a Roth IRA, which can be used for education purposes, then supposing my child decides to deceive me and not go to college, well then, this very account is still my retirment fund since I don’t have a sibling for it to go to at the moment. Is this your understanding of the 529 as well and have you researched the Roth IRA plans?
March 5th, 2008
We looked into the Roth IRA’s, but felt the 529 would better suit us, because we have 4 kids-if one drops out then we can transfer to another child.
The Roth IRA would be a good option for an only child though, because it could remain in your name. If your child works, you can also open a Roth IRA in the childs name that can be used for education and retirement savings for the child. It is a good idea for helping your child to become financially responsible.
Great Question and Take Care
LJ
March 6th, 2008
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