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Saving For College; How to do it and why you shouldn’t feel guilty for not

Saving for college is a huge task.  Not only does the cost rise faster than inflation you have a very short time frame in which to save.  There are some vehicles to help you get the biggest bank for your college buck.  None are perfect but all are better than nothing.

 529

529s are the most common way to save for college.  Each state offers a different plan and you are not required to use the plan from the state in which you live.  So definitely take the time to look around and find a plan that meets your needs.  The older the child the more conservative the plan you will need.

They are basically taxed like a Roth IRA.  Which means contributions are after tax but growth is free from federal taxes.  Most states also offer tax free status on growth for 529s but double check the laws in your state just to be sure.

The money in the plan can be used for qualified tuition expenses and anything not used for that purpose has a 10% penalty and the growth is taxed as income.

The only contribution limit is that they can’t exceed the “amount necessary to provide for the qualified education expenses”. If you withdraw more than $13,000 per year per kid then there starts to be gift tax issues.  You can learn more about 529s here and here.

Coverdell ESAs

A Coverdell ESAs is very similar to a 529. The only real benefits of the Coverdell is that they offer a little bit more flexibility investing wise. In the past they could be used to pay for education expenses in grades K-12 not just college but that changed last year.

They have a contribution limit of $2,000 per year per kid and the entire balance must be used by the time child turns 30 or the money is automatically transferred to the kid, along with taxes and penalties.

You can learn more about Coverdell ESAs here.

The big drawback of using educational savings plans for college savings is that if your child decides not to go to college you have to pay a penalty to withdraw the money out of the account. Yes, you can transfer the money to a family member but, honestly, how realistic is that option? I love my nieces and nephews but I don’t see myself paying for their college. And I don’t see my in-laws paying for my kid’s college either. So the reality is that you will end up paying 10% on the money if your child doesn’t end up going to school.
If that is a big concern for you then you can always just save the money in mutual funds.

Mutual Funds

Mutual funds offer tons of flexibility. You can obviously invest in anything you want not just what is available in a 529. Plus if it’s not used for college then you just move on with your life, no penalties or transfers or anything. The drawback here is that you lose the favorable tax treatment of a 529 and will have to pay capital gains taxes each year.

Feeling guilty for not saving for college?

Go ahead and call me the worst parent in the world, but I don’t plan on paying for my children’s education. I know I’m in the minority on this but I honestly don’t see that as part of my responsibility to them. They are welcome to live at home while they go to school full time. They can work for their tuition money while I provide all the essentials of life. I might even chip in for books or other needs if I can. I’m not saying they are totally on their own at age 18 but I don’t plan on putting aside several hundred dollars a month in anticipation for their college costs. If things change for us financially my thoughts on this might change too. But until my retirement needs are 100% covered I won’t be saving for college.

Plus, help for college doesn’t have to come before or during college. Help can also come later by paying off student loans or putting a down payment on a house. Help can come after you are no longer under the constraints of mortgage payments and raising kids. So it’s not lost cause just because you can’t save for college right now. Your help will always be appreciated, I’m sure.

7 comments… add one

  • Curiosity Killed the Blog March 26, 2012, 5:14 am

    Love this post and I totally agree! I don’t know why it’s my job to pay for my son’s education – he’ll be an adult and he needs to make his own decisions about what he is and isn’t willing to do. My parents helped me out during my first year, but after that I was on my own. And while I gripe and moan about my student loan debt all the time, it was MY education so I needed to pay for it!

  • Sharon March 26, 2012, 7:20 am

    We paid for 1/2 of my two daughters’ college educations (their father (my ex) paid for the other 1/2). I have two more kids that need to get through college and, of course, my husband and I want them to have the same head start. However, the cost of those 8 years will seriously impede our retirement funding…

    We will have to see what exactly we will be able to do to help, but it was nice to hear another opinion on the subject…

  • Ashley March 26, 2012, 7:36 am

    Thanks for the comments. I was worried about backlash by saying I have no intention of paying for my kid’s college. Eek. Obviously it’s a personal decision but if you can’t do it you can’t do it. I feel strongly that retirement savings is more important.

    And sorry for the weird formatting. It’s fixed now. Double thanks for getting through an article with no paragraphs! :)

  • Karunesh@chase-a-dream.com March 26, 2012, 10:01 am

    Thanks for sharing Ashley,
    Saving for education is important. My Parents put all there life savings to educate us. I have seen that these days parents do plan for education funds a lot earlier. That is good. Thanks for sharing about 529

  • Michelle March 26, 2012, 7:13 pm

    My parents did not pay for my education either, and I don’t think they’re “the worst parents in the world!” I wish they would have helped me out, sure ;) but they didn’t. Anyway, I do hope to be able to help my kids out as long as it’s a school I approve of. My husband’s parents paid for his and his siblings’ educations. They told them they could go anywhere they wanted and do anything they wanted with no regard for their grades being kept or what they chose to study. My husband picked a good 4-year college, but his brothers both picked trade colleges, got bad grades, and eventually dropped out, having wasted tens of thousands of dollars. I’m hoping to find a balance between my parents not paying a cent and my husband’s parents who paid tens of thousands and only got a good education for 1/3 of their children. College is expensive. My kids better get good grades and try their hardest. And they better work at least part-time WHILE in school to pay for their own partying expenses (I’m a realist) and their living expenses. I will pay for the dorm, NOT a party apartment with their friends. Thanks for breaking down the different options available today.

  • Bryan at Pinch that Penny! March 27, 2012, 4:06 pm

    My parents weren’t in a situation to really help with tuition expenses for my brother and I, but my grandparents were, and I’m very thankful that they helped set me up to start life as an adult without a buttload of debt.

    That said, I’m not sure that I’ll pay it forward to my kids. I might save some money, but I think that being on the hook for it might help them mature.

  • tj May 20, 2012, 9:48 pm

    Not to mention those of us that have student loans ourselves as parents. When our kids are in school the choice between paying our own loans versus paying for their school is difficult. Both of my kids are able to live at home and attend the local community college and take the first two years of school on me, books and all. After that I simply can’t help them, as I have loans and so does my wife. I cannot take any more via the PLUS loan system with a 2 year old that we adopted.

    The guilt that parents go thru is real, we all want to provide everything we can, and maybe that has inhibited my kids to an extent. They are both emotionally behind their peers by a few years as a result of the dependence. They are both relatively fragile and need the life experience of earning it for themselves before I am left with 30 year olds watching directv in my house and working part time.

    Sorry but you have to take care of yourself too that is compassionate to others, they will thank you later for not having to take care of you. Passing that along to our kids is a gift. So do what you CAN within reason I say, but don’t do it all and don’t be a hardass to the extreme either. Find the middle way that’s reasonable for YOU and don’t budge when the silent treatments and pouting begins.

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