Financial Friday – “It’s Your Money”

Saving for your Child’s Education- Part I

by Ratna*

As a parent we have so much to do – it’s a day to day, often, hour to hour survival.  Amidst doing chores, picking up kids, dropping off, cooking, cleaning, homework, and if you have babies, changing diapers, we have to find time to figure out this whole money thing. That’s right, money matters do not end just because you got that fat refund from the IRS in April. It is an ongoing process.  If only I had a crystal ball to figure out if my 2 year old will go to college and grad school, and whether she will get scholarship.  Unfortunately we won’t know that now nor will we know how we are doing job and economy-wise so it is good to plan for your and their future.  This series of It’s Your Money! focuses on saving for your child’s education.  In Part II, I will discuss the two most widely used vehicles for college and educational savings- 529s and Coverdell ESAs, and in Part III, I will address Custodial Accounts.

If you went college, you probably remember it well but perhaps forgot the costs unless you are still paying the loans.  In-state public tuition may have averaged $5000 per year (just tuition, not any other costs).  But, today, the cost of an identical college education is double, even triple that, and again, that does not take into account room and board, books, fees, insurance, or other expenses.  The average in-state tuition for a public college is $10,000[1].  A CNBC news report by Scott Cohn in December of 2010 sums it up the best: “The cost of a college education is rising faster than the cost of medical care and as much as three times as fast as consumer prices in general. But that’s just the beginning of the price of admission.”[2] Statistics from this report and other reports like it indicate that almost two-thirds of graduates leave with a sizeable debt when they graduate.  “America’s student debt at the end of 2010 is nearly $880 billion.” The article addresses some of the pitfalls of student loans as well – there is no walking away per se and unlike a home mortgage in which you would lose your home and property, in a student loan default situation, the harm could be for a lifetime- it could follow you or your child for a long time to come, and interest on the unpaid amount compounds daily.

This makes savings for college a must! In order to prevent a situation where you have to take a loan or second mortgage upwards of $80,000 for a private or even state-funded school, it is important to start saving for your child’s education from day 1- the day you get that social security card and it goes beyond a simple passbook savings account.  There are better savings options available and putting in as little as $1000 a year can get your little one a sizeable nest egg that he or she can use for college tuition, books, living expenses, and more (depending on the vehicle you use to save).  It all starts with you and starts by knowing the tools at your disposal.  If you are working parents, there are also ways through your employer to put money in a dependent care spending account (max. per year is $5000 per family) and get pre-tax benefits on daycare and preschool expenses as well.  If you plan to send your child to public school, you should be aware that even the cost of public school is no longer “free” like it used to be.  There are often fees, and cost associated with a public education these days as well and with the recent cuts announced by almost every school district including here in Colorado, you definitely need to start saving early.

Stay tuned for the next two articles to see what vehicles for educational savings are available but before you save for any of the plans or methods I will discuss, it is important to also know your goals and estimate how much money you think your child will need when they will enter college (depends on the age of the child too). When you estimate the costs, do not forget about the possibility of grants, merit scholarships, sports scholarships, and other programs that may be at play which could reduce that estimate. When In doubt, plan for the higher estimated amount.

– By Ratna Gupta*

*Ratna Gupta is a wife, and mother of two who lives in Colorado, and blogs useful financial tips, consumer reviews, and mommy experiences at http://getcluedincolorado.com .  Check out this and other great articles at her blog, Get Clued In!

Disclaimer: All parts of this series were written by the author in her personal capacity and not attributed to her profession, or any organizations, employers, or the like that author is affiliated with. The author is interested in these topics and blogs for recreational purposes and not for financial gain. All views and opinions are of the author and not attributable to any company and not meant as an endorsement to any company or organization. Most importantly, author is not a financial expert, tax attorney, estate planner, or accountant, nor works in the financial planning field. This article is written solely for the purpose of sharing information and knowledge with the readers. All readers should consult with their own attorney, tax planner, financial or estate planner, and/or accountant prior to making investment decisions. The author is not liable and will be held harmless for any investment loss or risk undertaken as a result of opening any of the accounts aforementioned.


[1] Financing Your child’s Education, Deborah Fowles, About.com, referenced at: http://financialplan.about.com/cs/college/a/FinanceCollege.htm

[2] Student Loans Leave Crushing Debt Burden, Scott Cohn, MSNBC.COM, referenced at: http://www.msnbc.msn.com/id/40772705/ns/business-cnbc_tv/#

Comments

  1. Great introduction. While college savings are important, it should be considered as part of a family’s overall financial plan. That plan should include lowering bad debt (credit cards, etc.) and having an emergency fund and retirement funds.

  2. Steve has a good point. But for me I know I want to save for college, but have always been confused on the benefit of 529’s. I prefer to put it away in Roth IRA’s so the money grows tax free. Any thoughts maybe when you cover the 529’s and Coverdells?

  3. Thanks Steve!! This is true… college and educational savings is just one part of the overall picture. Thanks for your comment.

  4. Daria- thanks for the comment.
    Next Friday – another Financial Friday, the 2nd part should be posted. The original article was written with everything and it was too lengthy for blog audiences so we have to split it all up. But we can chat anytime off-line as well. feel free to drop me a line at: ratnajag@gmail.com

    I am no tax or financial advisor so always consult one before you go forward. That’s my disclaimer. Ha.