I’ve already gotten the talk from everyone about how my DH and I have to start our college savings for our unborn child. OMG. It’s actually getting sort of stressful, hearing about how expensive college is and how we need to be saving a TON. Yeah, trust me I know! Ask me what a private school tuition cost and I can tell you since we’ve been paying on my DH’s MBA!
Anyway though I guess I’d lay out our goals and ideas for college savings for our baby. We can’t really do it right now. At least not at the level people are telling us to. Sorry not going to happen. We have a lot of other expense and honestly while it’s a great idea and I would love to do it, I don’t personally see college savings as a “absolute necessity” like retirement.
So what do we want to do? We want to save $2k/year into a Coverdell Education Savings Account. This is a reasonable and manageable goal I believe. That would give our baby $36k in deposits if we do it for 18 years and time for the investments to grow and compound. In theory, there should be $61k after 18 years with a 6% return on investment. While not enough to cover 4 years at a private or public university it’s better than nothing.
Some restrictions are that your modified gross income is less than $220k for a married couple and $2k annually up to age 18 for the child. If you don’t spend the entire account, it can be rolled over tax free to another account. All distributions are tax free if used for eligible education expenses.
I believe that if we save that much, we’ll have the flexibility to afford paying for the rest of college. We can’t predict if she’ll want to go to college or where or when. Or how many other children we’ll have.
So to everyone nagging at me about my college savings. Yes I’m getting started and yes I know it’s expensive. I didn’t know that I had to pay 100% for college, and that I’m bad parent if I don’t. I also didn’t know that it was wrong for me to want to get our retirement, mortgage, and student loans paid off in a reasonable manner before college savings.
So to me, I think saving $2k/year for now and adding more as we increase our income is the best way. What other suggestions do people have for college savings? Should we start now? Wait until we pay off our debts?
16 responses so far ↓
1 R.May // Nov 24, 2009 at 9:28 am
My take on college is I will have so much money. I can afford in state tuition. She will be able to go wherever she wants but anything above and beyond she pays. She will also be encouraged to go to the local community college for her first two years.
2 savvy // Nov 24, 2009 at 9:32 am
I don’t have kids so feel free to take my advice with a grain of salt. I think your method is the best one. Put aside $2k/yr for now. Don’t contribute more until you have all non-mortgage debt paid off and your retirement accounts fully funded. You can always borrow for school but you can’t borrow for retirement.
3 LAL // Nov 24, 2009 at 9:43 am
R.May that’s my goal too, in state tuition at least for 4 years. Anything more is her business.
Now it also depends on what sort of child she is, as I’ve seen with my nephews and nieces, some need more help because of ability or problems than others.
4 Meg // Nov 24, 2009 at 10:21 am
My goodness! How much does college cost up there? At UF — a REALLY good public school, imho — it’s about $4,300 for tuition and fees a year (30 credit hours). That comes out to about $17k after four years.
Of course, that doesn’t take into account inflation or housing, I know. But neither does it take into account scholarships/grants, either — or going to a community college for the first couple years, which lowers the cost. And I’d recommend that anyone going to college get some sort of work experience before or during (if you don’t need the money, volunteer or do an internship). That way, you find out what you like to *do* and not just *study*, plus you come out of college with something to put on your resume.
Anyhow… I agree with savvy. Get rid of debt and pay for retirement first.
Also, be sure that anything you put your money into can be taken back out and used for other things without harsh penalties. You really don’t know what will happen in the future. Maybe she’ll want help starting a small business instead. Maybe she’ll get a 100% scholarship. Who knows!
5 Megan // Nov 24, 2009 at 11:26 am
When I graduated in 99(from a private university) – my total tuition bill was $130K. I did it with help from my parents, some loans, some scholarship. Tuition at that same school is now above $200K. In 1o years. The cost of education is outpacing inflation in a big way and the demand for education is increasing at an astronomical rate. So even public school tuition will go up.
That said…I have a baby – we save for college. Not at the rate financial planners tell us to. But, we contribute what we can and I expect as we make more money, we’ll have more to contribute. It’s a priority for us, but it doesn’t affect the savings/retirement/mortgage goals that we had before baby. Maybe some lifestyle things have changed, but our lifestyle has changed quite a bit.
You’ll also find that your habits change quite a bit post-baby. So despite paying more for some things – food, health insurance, life insurance, etc. – we end up with more money overall. And at the end of the year – unbudgeted extra $, that may have gone to a splurge around the house – it goes into the college fund.
Basically, I don’t stress out about it, but I do keep it on the table .
6 Lindsay // Nov 24, 2009 at 11:32 am
I agree that 2k a year is a good goal for now, especially because you’re not using the rest of your income for lifestyle inflation. Why save more than that if you’re still paying off your DH’s own student loans? I know someone who is trying to save $1k a month for her baby’s college tuition because a financial adviser told her to do so. Seems a bit excessive to me but maybe I’ll feel differently when I have kids.
7 sarah // Nov 24, 2009 at 11:53 am
Not sure what DH and I will do when we have kids. Both of us came from families that could have afforded to pay for our educations, but neither did. DH and I each paid our way through school with scholarships & loans.
My friend’s grandparents set up their estate as a trust for their grandkids’ college. The rule was the students had to pay their own way, keep good grades, and not get in trouble. When they graduated, if they met the requirements, their loans were paid in full. Kept the kids motivated, and the ones who just messed around ended up paying for it themselves.
Not sure if I will take that route exactly, but I like it. Maybe make it a secret….who knows.
8 MW // Nov 24, 2009 at 12:16 pm
I am 33 weeks pregnant and my hubby and I were also beginning to think about setting up some sort of 529 for our little one. Then I went to our financial planner, who said actually that we’d be fine waiting a while. So while I agree you need to do something, my suggestion is to try not to stress about it at least until the baby is born!
9 Lynn // Nov 24, 2009 at 12:43 pm
We are saving for our twins a little less than the amount that you are thinking about. We put $50/month for each of them into both a 529 and a coverdell. So its about $1200.00 a year for both of them. We also are saving $1000.00/year in ING accounts for them so that not all of their money is in education accounts incase they decide not to go to college.
I don’t expect to completely pay for their education even though my parents paid over $100K for my private university tuition. I graduated in 1996 and at this time it is over 50K a year. Crazy. There is no way we could afford this now or in 15 years when they go to school. Since I live in NJ there aren’t very many good state schools. I don’t expect my girls to go to Rutgers because I myself wouldn’t go there. LOL!
10 Meg // Nov 24, 2009 at 2:52 pm
Just curious, why are you choosing a Coverdell over a 529 Plan? You can contribute a lot more to 529 plans, plus there are no income phaseouts.
The one clear advantage to a Coverdell is that it can be used for secondary edu; 529s only for college. Are you considering that as an option?
(PS, this is Meg from The World of Wealth, not the one from the comment above)
11 WellHeeled // Nov 24, 2009 at 7:40 pm
Same question as Meg’s. If I have a kid, I think I’ll go with the 529 – but that might be just because I’ve read more information on 529s than Coverdells.
I think $2K a year sounds good, esp. because you’re starting so early. I would also suggest that any gift money your child receives be put into the savings account.
12 Thinkingaboutit // Dec 1, 2009 at 11:48 am
Confession: I made zero provision for college and do not regret it at all. We put our dollars into education well before college, so that college took care of itself with scholarships. Now grad school for the kid is on the horizon. That will be covered plus a stipend for research assistantship or something of the sort. I get to retire, hey-hey.
13 LAL // Dec 1, 2009 at 12:00 pm
Meg it depends on whether they go private or public schools. College costs are far outstripping inflation.
Megan, I am hoping that our lifestyle changes, but maybe not. People say you spend more with kids.
Lindsay, that’s it exactly. They make you feel like a bad parent for not saving $1k/month, but it’s hard to save that much.
Sarah, that’s what the plan is, it will be grades based and our children will have to take out loans. But it will be semester dependent and class dependent. Maybe we’ll end up paying a portion too, like A and B 100%, C 50%, D and F 0%.
MW, I’d rather do this than set up the nursery!
Lynn, I’d like to fund a public university education, which is what DH and I got. I think that’s enough savings.
Meg, coverdell? Because it has a nice $2k limit, and I doubt I’ll be able to save more than $2k for a while. We have a lot of other bills. We have retirement, student loans, new car to worry about, etc. I think it’s easier to focus on the coverdell and any extra into a 529.
We aren’t in a position to honestly be saving more than $2k which is almost $200/month!
Well Heeled, that’s another post about what to do with gift money. Should some be given to the child to spend or all saved?
14 LAL // Dec 1, 2009 at 12:16 pm
Thinkingaboutit, do you make a lot? I know I didn’t qualify for any need based scholarships and neither did my DH based on our parents income. And unfortunately our kids will be in the same boat, screwed.
I had national merit, top scores, etc. But I couldn’t land any scholarships. Neither did my DH.
Because of this, I know my kids will have trouble. They will only have aid based solely on exceptional merit.
They won’t qualify for pell grants, or any grants based on your parents making less than $100k or something for example.
That’s where you get screwed if you make a good amout of money, but don’t save for your children.
15 Thinkingaboutit // Dec 2, 2009 at 8:10 pm
Our child did not get any needs based scholarships. He got multiple merit scholarships which added up to tuition, books, and part of housing. I do think we are in the income range that we would not have qualified for need-based grants, but also could not have saved much for college. We make a scosh over US median household income here at the end of our working years, but of course we made less in earlier years. Had he not gotten scholarships, we would have helped him, he would have taken an extra year or two to get through school, he would have worked more hours, and he might have gone to a different school. I figured where there is a will, there would be a way.
16 LAL // Dec 3, 2009 at 1:28 pm
Are you making $50k/year? If so you qualify for need based aid at most private universities, under merit based grants.
I’m talking about families making $100k or more and not qualifying for any aid.
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