3 Steps Toward Saving For College
Saving for college has become a large factor in budgeting for retirement. It certainly has for mine. Here are 3 simple things to consider when planning for your child’s education while keeping your own finances in order.
1. Determine An Amount
According to FinAid.org, college costs increase at about twice the inflation rate. Current increases have averaged 5% to 8%. Go ahead…use their College Cost Projector and see for yourself.
Based on trends in college pricing by The College Board (the 2006-2007 average total costs including tuition and fees, room and board, books and supplies, transportation and other expenses were $16,357 for students attending four-year public colleges and universities), here is what the estimated cost of sending my 4-year-old son to school will be according to the College Cost Projector:
| Public Institution |
| First Year Projected Costs: | $42,177.08 | |
| Second Year Projected Costs: | $45,129.48 | |
| Third Year Projected Costs: | $48,288.54 | |
| Fourth Year Projected Costs: | $51,668.74 | |
| Total Projected Costs: | $187,263.84 |
Tuition inflation rate of 7.00% with each year adjusted after matriculation
Using the same metrics for a four-year private college or university at the current average per year of $33,301, the total projected cost is $381,247.99.
2. Set Up A 529 Account
There are many advantages to using a 529 college savings plan versus a traditional savings account or other savings vehicles.
- Earnings on a 529 account are not taxed.
- If your kiddo gets a scholarship, any unused funds can be withdrawn without penalty. However, you must still pay tax on the amount.
- Your child does not have control of or access to the account. Only the account owner (usually the parent or guardian) has access.
- Most 529 plans do not have an age limit for the end user. If you decide you want to head back to grad school someday, you can use the 529 to do that.
- In the event your kiddo wants to “skip a semester”, you have the option of transfering the account to another family member.
Be sure to check out Upromise to see how you can save money with everyday purchases. Our family currently uses it, and we’ve saved a bunch. The trick is to get as many people involved.
To learn more about 529 Plans in greater detail, the SEC (sec.gov) has a great Introduction to 529 Plans.
3. Don’t Ignore Your Own Financial Situation
It is easy to overlook your own finances, specifically with regard to retirement planning. Revise your budget often. Stash some away for your own retirement, especially if you can take advantage of a company-matching 401(k). Pay down debts. This is the method I use personally when determining the amount I save in Lil D’s 529. Why? Keep in mind that student loans have been and (probably) always will be among the least expensive borrowing tools. Worst case scenario — let them pay for it with student loans. They’re cheaper than your 11.9% interest rate credit card and your 6.2% mortgage.
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June 21st, 2007 at 10:51 am
Nice post Derrich and thanks for the link to my article on a potential parenting mistake.
We currently use a 529 account for both of our children as well but haven’t mortgaged our retirement plans to cover their education costs. We planned out what we needed to do to reach our retirement goals and then fit college savings into that plan.
June 21st, 2007 at 1:15 pm
Thanks for the tips … gotta get my act together for my little lexi …
Darin
June 21st, 2007 at 1:16 pm
I had to pay for my own college. :/
June 21st, 2007 at 8:20 pm
very nice information. although I am no longer a college student … It is still helpful.
Thanks!
June 23rd, 2007 at 10:09 am
Blah, college tuition! Mine’s about 17k a year. I think I also spent about 1.5k on food and other misc things during my 2nd year at Cal Poly…It gets quite expensive
I’ll be about 30k in debt by the time I graduate because of loans…
-Gregg
June 23rd, 2007 at 11:44 am
I live in Florida and was able to lock the tuition cost in the year my daughter was born by purchasing a pre-paid plan. Her tuition is paid for now, thanks to some input from my folks. Of course, I still need to think about books, room, board, etc.
March 3rd, 2008 at 2:31 am
[…] a 529 Account. With tuition costs rising (certainly outpacing inflation), this is a great way for you to help your children save now rather […]
June 17th, 2008 at 8:25 pm
the rate at which tuition is increasing is mind-boggling. the 529 account is a great tip.