Saving for college when time is on your side

According to the Federal Reserve, the average amount of student loan debt carried by a student graduating in 2012 reached a staggering $24,301. And that isn’t the only scary student loan statistic. Overall, student loan debt in the U.S. has reached a cumulative $902 billion dollars, and loan delinquencies are at an all-time high. This is depressing news for everyone, including those of us who want our children to be able to go to college.

Saving for an unpredictable future

Since my kids are so young, I shudder at the thought of what a college education could cost when they graduate from high school. College tuition has outpaced inflation at an astronomical rate. And worse yet, the job outlook for college graduates isn’t all that great. In addition to all of that uncertainty, I’ve found it difficult to do much planning since there are a gazillion possible outcomes. Will my kids go to community college? An in-state university? Will they pursue an advanced degree? At this point, I cannot possibly answer these questions. Still, I haven’t lost hope that I can help them avoid taking on a soul-crushing amount of student loan debt. I certainly can’t predict the future, but I can at least try to prepare for it. And while I don’t necessarily plan on paying for all of the costs of my kids’ college education, I do want to help them as much as I can.

Since I want to shield my children from having to take out enormous student loans, I started saving for their college right away. Once they were given Social Ssecurity numbers, I opened a College 529 account for each of my kids. It was easy to set up their accounts online, and I slowly began putting away small amounts of money on a fairly consistent basis. And I mean s-l-o-w-l-y. When we started saving for them, we began by contributing only $25 per month.

Small sums of money add up

It took a while to see any real growth, but I’m amazed at what I’ve managed to save during their short little lives. I’ve actually been able to build up a decent amount of money for them, and it’s a great relief knowing that I’ve managed to save something. I’ve still got a long way to go, but I did manage to get started and I hope to increase contributions to their accounts steadily over the years.

Saving for college may seem like an impossible feat, but it can be done. If you haven’t started saving for your children’s college, and want to, here are some tips to get started.

  • Make sure that your own finances are in order. Before you start saving for your children’s college education, make sure that your own financial house is in order. Are you saving adequately for retirement? Do you have an emergency fund? Are you in debt? Saving for your children’s college education is admirable, but it shouldn’t be at the cost of your own financial well-being. Once you have your own finances in good shape, you will be in a better position to help your children with theirs.
  • Open a tax-advantaged college savings account for your child. Do some research online and determine what plan is best for your child and situation. I chose my state’s college savings plan because of low administration fees and investment choices that I was comfortable with. It’s important to note that United States residents are not limited to investing in their own state’s plan. Compare plans and choose one that your family is comfortable with.
  • Explore tax advantages for your savings plan. The state that I live in, Indiana, generously offers a 20 percent tax credit on the first $5,000 I put into my children’s 529 plans. This means that I make an instant 20 percent on the first $5,000 that I contribute in any given year. Many states offer a tax credit for money saved in a 529 plan. Check with your local government and determine what tax benefits may be available to you.
  • Start small. The future costs of a college education could be overwhelming, and it’s easy to put saving off for another day. Start by making small monthly contributions to your child’s account. The sooner you start, the better, and small amounts can accumulate and grow tremendously over time. When we started saving for our children’s college education, we were still in debt. Since we were still getting our own act together, we started by contributing $25 per month per child. That amount has grown over time, but I’m still thankful that we started when we did.
  • Make savings automatic. Many online bank accounts will allow you to make your monthly contribution automatic. Set up an automatic savings plan and “set it and forget it.” Even small contributions can add up over time. This is especially true when money is saved automatically on a consistent basis.
  • Add gift money and found money to their accounts. Whenever my children get money for birthdays or holidays, it goes straight into their college savings accounts. This can often be several hundred dollars per year and is a great addition to the money we choose to save for them. Letting their gift money grow over the years is a great deal for kids and parents alike.
  • Ask family and friends to contribute. Make sure that family  and friends are aware of your child’s college savings account and encourage them to contribute in lieu of gifts. Of course, this may go over with some family members better than others. Still, there is nothing wrong with making people aware of your education savings goals. You may even find that family members actually want to contribute.

The thought of saving for college can be paralyzing, but it isn’t that hard to get started. Just remember that it doesn’t have to be “all or nothing.” Even if you are only able to save enough money to pay for part of their education, it’s still better than not saving anything at all. A huge commitment doesn’t need to be made, and setting up a 529 plan is usually easy and painless. Don’t let anything stand in your way and don’t get discouraged by statistics or scare tactics. Instead, channel your energy into your savings goals and enjoy watching your college fund grow.

What methods are you using to save for your children’s college education?

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There are 81 comments to "Saving for college when time is on your side".

  1. Kati says 04 April 2013 at 04:34

    Great post. While I don’t have children yet, I do hope to have them in the next year or so. When they do appear, I want to start saving for their future from the onset. Like you say it’s not about putting away a fortune but just a little bit regularly. I figure if I put in $2000 into some high yield shares, after 18 years there will be a nice sum that can pay for a college education or at least a part of it.

    • Michelle says 04 April 2013 at 05:29

      I actually “beat the system”. I also am at the luxury of having the sweet 20% Indiana deal.

      I started saving for my daughter’s college education years before having my daughter.

      I socked away money in a 529 account under my nieces SSN (you can actually do it under your own SSN now). When my daughter was born I transferred most of the money from my nieces’ account to my daughter’s account. When my daughter was born, she already had $20,000 in her 529 account. That started with just saving $25 a month.

      • Steven J Fromm says 05 April 2013 at 05:46

        That transferability feature is one of the best things about the program and in most states it can be transferred to most anyone.

    • Adam - HireMeHigherEd says 04 April 2013 at 06:07

      @Kati – Unfortunately, I don’t think $2000 lump sum invested would yield the amount you think when compared to the estimated cost of a college education in 18 years. I would recommend continuing to contribute small amounts ($25 or $50 per month as mentioned by the author) to pad this account, and take advantage of dollar cost averaging. Best of luck!

    • Jenny @ Frugal Guru Guide says 04 April 2013 at 08:53

      $2000 a year? Likely. $2000? Won’t scratch the surface.

      • Kati says 04 April 2013 at 12:51

        Haha, sorry my mistake. That was supposed to be $2000 a year which works out to be about $40 per week.

  2. Wm says 04 April 2013 at 04:59

    I know. College costs are staggering. My advanced degree cost a huge hole in my parents’ pocket and I haven’t even got the expected ROI out of it. It’s the second biggest regret of my life. If I could go back in time and undo it, I would. I would have been much happier with my engineering degree and the job I got after that. But hey, this is all very hindsight 20/20 and you can only connect the dots backwards.

  3. Short arms long pockets says 04 April 2013 at 04:59

    I didn’t start neary early enough but managed to get the first kid through (in-state university) debt-free and am now working on the second.
    As a result the graduate was able to take her dream job overseas. I truly feel that it is the best gift we could have given her.
    Looking back, I would say to anyone with kids that Holly is absolutely right – every little helps.

    • Holly@ClubThrifty says 04 April 2013 at 05:10

      This made me tear up!

      This is EXACTLY why I am saving for my kiddos college. I want them to be able to follow their dreams without having to worry about a ridiculous amount of student loan debt.

  4. The Norwegian Girl says 04 April 2013 at 05:32

    Since tuition is free in Norway, there really hasn`t been any tradition for parents to save for their children`s education. we do have to take up student loans and grants to have something to live on. Still, I think that when I one day have kids I`ll probably save money for their education.

  5. graduateliving says 04 April 2013 at 05:33

    I love the note about letting people know contributing is an option. A girlfriend of mine had her first about a year ago and number two is on its way. I would love to be able to gift them money for a 529, since they don’t/won’t need anymore stuff. Particularly when kids are super-young and don’t know any better (i.e. the first few years of life) I think making those contributions can be a more meaningful gift.

  6. Elizabeth says 04 April 2013 at 05:39

    I second the point about asking friends and family to contribute! My nephew has more toys, books and clothes than he needs, and my SIL can find them at better prices than I can anyway. (Thanks to hand-me-downs and consignment stores.) They’re excited to be building a college/university fund for him and many of my family members are contributing.

    One thing we learned when talking to financial advisors is that the amount the government contributes is limited to child, not the contributor. (In Canada, it’s 20% on $500 per year.) For now, we’re giving the cash to the parents and letting them claim the tax credit and the matching rather than setting up our own funds.

  7. Marsha says 04 April 2013 at 05:41

    We’re about 25% through our goal of getting our sons through college debt-free. The crunch time begins this fall, when our younger son joins his older brother at college.

    We did not open 529s for our kids, since we were concerned about the effect money in their names would have on their ability to get government grants and loans. Instead, we concentrated on saving as much as we could in our retirement accounts, paying down our mortgage, and paying off any other debts.

    We also worked with them throughout high school, encouraging them to take honors courses and to get high grades. They also studied hard for college entrance exams. The result: both got generous merit scholarships. We’ll pay the remainder of their expenses out of regular income, with the fallback of being able to take out a home equity loan or a 401k loan if necessary.

    Even with a plan that has worked well so far, it’s still daunting to look at the current cost of college. Our parents got us through college debt-free, but that was the 1980s. It’s a whole different world now.

    • Matt Becker says 04 April 2013 at 10:28

      Marsha, congrats on getting your kids so far through school! Scholarships are definitely a great way to make a big dent in the cost. Just wanted to clear something up from your comment. A 529 account is counted as a parental asset, whether owned directly by the child or by the parent with the child as a beneficiary. You can see a more detailed description here:

      Parental assets factor much less into the financial aid calculation than assets owned directly by the child. This is another reason a 529 can be a great tool.

      • Marsha says 04 April 2013 at 16:01

        Is this a recent change? When we decided to go this route 20 years ago, our research showed 529s counted as student assets. I still think home equity and retirement accounts were the way for us to go. They don’t count as assets for parent or child on the FAFSA. And you don’t have to spend them on qualified expenses.

        • Matt Becker says 05 April 2013 at 03:27

          Based on the link in my previous post, it looks like the change was made for 2009-10. So when you were deciding it was very likely different.

          I definitely understand why you went the route you did and I’m glad it’s worked out for you. While I absolutely agree that retirement accounts should be maxed out before saving for college, I think it’s risky for most people to use retirement accounts for college savings. Retirement is so important and using that space for other purposes is, for many people, not the right move, even if it’s right for you. Also, home equity certainly CAN be a source of cash flow, but as we’ve seen in the past few years it’s not something you can count on.

  8. Jane says 04 April 2013 at 05:45

    I am curious why Holly didn’t explore the pitfalls of 529s, of which there are several. First, all that money earmarked for education will effect your financial aid. They say it won’t, but honestly I don’t believe them. 🙂

    I have this paranoia about 529s for some reason. We have one set up for our kids, but I would encourage parents to diversify their college savings, just like they do with their retirement. What if the state in which you have your 529 is not solvent or goes bankrupt? I know that sounds paranoid of me, but there are cases where people have pre-paid their state tuition (like in Alabama) since their child was born, only to have the state say “Oops, we don’t have that money anymore!”

    I guess my point is, go in with eyes open and realize that even 529s aren’t necessarily the end all be all of college savings. Plus the mutual funds are usually pretty limited.

    Our main savings vehicles are the Roth IRAs. You can deduct contributions (not earnings) for educational purposes. Plus we hope to pay off the mortgage and all other expenses so that we can contribute a fairly large monthly amount to tuition while the kiddos are in school.

    But otherwise? My kids are going to take out loans, and I am going to encourage them to attend state schools to keep costs down. If the loans become a problem in early adulthood, we can always offer to pay them for a few years. But a reasonable amount of student loan debt (and honestly I consider $24,000 reasonable) is just part and parcel of going to college. These days people take out perennial car loans for that much and don’t blink an eye. At least a college education in theory appreciates over time, since it enables you to earn more.

    My dad probably had the money to pay my tuition in full, but I had to take out loans anyway. I ended up with around $15,000. Honestly I think it was good for me, since it meant I had a financial stake in my education. But I went to one of those ueber expensive private schools. I don’t believe he made my siblings (who went to state schools) take out loans.

    • Holly@ClubThrifty says 04 April 2013 at 06:04

      I don’t blame you for being paranoid, but my children’s 529 accounts are currently considered parental assets, not assets of my children. At this point, I don’t have any reason to be paranoid…but you’re right. Rules could certainly change by the time my children hit college. Unfortunately, I don’t know what the future will hold.

      I am mostly saving in the 529 accounts to take advantage of my state’s generous tax credit. However, we are somewhat diversified in our college savings. We have two rental properties that will be paid off right before my kids graduate from college, and I plan on using the rental income to supplement what I have saved for them.

      My kids are so young that it really is hard to make concrete plans for anything. Taking everything into consideration, I feel like I am making smart choices and hope that they all turn out as planned!

      • imelda says 04 April 2013 at 06:48

        I think she’s referring to the fact that, very generally, the greater your assets, the greater your “expected parental contribution” will be. 529s will certainly be counted towards that.

        It’s hard to say what’s best in advance, because who knows what school your child will want to attend, and how much grant money that school will be able and willing to supply. 529 money *could* decrease the amount of loans required…. or it could decrease the amount of grant awarded, thereby becoming a colossal waste of money.

        Given such uncertainty, I have to say that an above commenter’s strategy of focusing on paying off the mortgage and saving for retirement, in order to free up cash flow later, makes a lot of sense to me.

        • Holly@ClubThrifty says 04 April 2013 at 06:54

          Sure, but whether I save my money in my children’s 529 accounts or elsewhere, it will still be my asset.

          I’m in total agreement and saving for retirement and paying off my mortgage. In fact, my mortgage should be paid off while my kids are still in grade school if everything goes as planned. However, I personally wouldn’t feel comfortable withdrawing money from my Roth IRA because it is part of my retirement savings. But, to each their own. Saving is a good thing and there are lots of ways to strategize.

        • sarah says 04 April 2013 at 08:14

          I think the difference is that if you pay off your mortgage that is actually not an asset and wouldn’t disqualify your kid like a 529 might.

      • Mom of five says 04 April 2013 at 14:29

        But Jane makes a good point. Our oldest is currently a sophomore in high school and I’ve been looking into all the funding stuff. Typically a college will expect to take up to 50% from a 529 account each year before tapping other sources, like parents’ savings. Because they’re officially retirement accounts, Roth accounts weigh even less against aid than regular savings accounts.

        We’re not expecting any aid. We should be able to pay for state school without too much difficulty. We have a small 529 but have been doing Roths since we were eligible for them via conversion. We ditched the 529 for all the reasons Jane stated but primarily because if the financial bottom were to fall out of our house, we’d rather have control over our savings than be forced to spend it for our children’s college. Roths give us that flexibility and also will not count so heavily against us as a 529 in the unlikely event that we do end up qualifying for financial aid.

    • Danielle says 04 April 2013 at 13:38

      Encouraging them to attend state schools is NOT necessarily the cheapest way to go. If you are even remotely middle class, you won’t get a penny in aid from state schools–only offers of loans. As a financial planner, the people I see with the biggest education debt for undergrad work all went to state schools. You have to look at the cost of attendance. With private schools, there is some discretion in how they award their own money, and a great private school can cost much less depending on what offer they extend.

      Also, if you’re eligible fully funding a Roth first is smarter than 529s, with small amounts. You can withdraw the Roth for education without penalty, and keep it for yourself if your kid(s) don’t need it or don’t use it.

      IMHO, 529s are a savvy move only if you’re positive you won’t be eligible for aid and you’re in a high enough tax bracket to make tax free savings worthwhile right now. Otherwise, Roths or simply investing in tax-smart ways (i.e., ETFs instead of mutual funds) gives a lot more flexibility.

      Also, $25,000 is not so much debt. It’s as if the kid has bought a car, and most people who buy cars pay them off in 5 years. It’s when the debt, particularly for undergrad, is more like $100K or $120K. Then, it’s more like buying a house. No one should borrow that kind of money as an undergrad, unless they’re in computer science or engineering, or a field where you can be assured of a really high paying job. Rule of thumb: don’t borrow more than you’ll make the first year. That way, you can reasonably pay it off in 10 years without too much stress (or before!)An education is worth some effort.

      And you don’t have to save the whole amount–some can be paid out of your then-current income, which will hopefully be higher as you yourself age and progress in a career.

      • Jane says 04 April 2013 at 15:53

        Danielle – you’re probably right, depending on the parent’s assets or lack thereof. But I say that about state schools, mainly from my own experience. My parents were extreme savers and really got dinged for it on my private school education. Even though tuition in the 90s was $20,000 a year (NOT including books, housing etc), we didn’t get a dime in grants or financial aid. And this is from a household that never made over 50,000-60,000 a year. But since my parents saved their whole lives, we were expected to pay it all. In that case, it would have been oh so much cheaper if I had stayed in state and gone to a public institution like my siblings did. I loved my university, but it wasn’t worth the money in hindsight.

        The last time I commented on how my parents had to pay in full, I remember someone saying, “Of course they should pay – they had the money!” But that just seems really stupid to me, because they only had the money because they lived extremely frugally. This is just encouraging people not to save. It would have made more sense for my dad to buy a lot of cars or houses in cash right before I went to college. Then I probably would have gotten aid.

    • Belleweathe says 04 April 2013 at 20:22

      While the feds might agree to count a 529 as parents income, if you’re looking at a private school, they can do all sorts of wacky things when it comes to deciding if you’re eligible for their own private institutional aid. If you’re low or moderate income, institutional aid can be the thing that makes a private college not only affordable, but even cheaper sometimes than state school, so it’s worth being very careful about how you save money for your children.

  9. My Financial Independence Journey says 04 April 2013 at 05:47

    In addition to saving money, you should make sure that your children take school seriously. If they’re B students, you’re going to be paying for everything. But if they’re A students, they might get scholarships, which will help out a lot.

    I worked my tail off in high school, which is how I managed to go to college for free. It’s a question of priorities. I traded in the often called “best years of my life” for a free education.

    • Holly@ClubThrifty says 04 April 2013 at 05:59

      Oh, I definitely will….but they are only 3 and 1 right now. =)

    • Beth says 04 April 2013 at 07:52

      Agreed! I don’t think we’ll be able to give our kids much for college, but I know we’ll do what we can to help them with AP courses, taking community college classes during the summer, etc.

      We will also let them live at home after college, if that’s feasible for them. If nothing else, at least they won’t need to worry about rent, food, etc., and can pay down their loans a lot faster.

  10. Matt Becker says 04 April 2013 at 05:56

    This is a great article and really hits the high points. I especially like the point about focusing on yourself first. Saving for retirement is a big priority that needs to be put before college savings. But if you’ve got that stuff handled, I definitely agree that even contributing a small amount is a great idea. My wife and I currently put $50 per month into our son’s 529, which won’t add up to vast sums but gets the ball rolling. Hopefully we can increase that amount in the near future.

    One point I want to mention is that you shouldn’t automatically assume that your state’s plan is the best deal just because it offers a tax break (and not all states do. My state, Massachusetts, does not). Make sure to look at the annual fees as well, as those can actually outweigh any tax break if they’re high enough. Compare your state’s plan to a low-cost plan in another state, such as Nevada’s plan through Vanguard, to make sure that any tax break is really worth it.

  11. nicoleandmaggie says 04 April 2013 at 05:59

    We’re using Utah’s 529 because our state doesn’t give benefits and Utah is low fee and offers good options from Vanguard.

    It’s been easy to donate pretty substantially to the 529 while my husband has been working, but now that he’s quit his day-job we’re a lot less certain about what the priority of our investments should be.

    We’re on track for retirement savings and I’m contributing 12% of my income to retirement going forward. We also have a mortgage at 4.75% and probably 12 years before our oldest hits college (17 before our youngest).

    Because of some extra work I’ve done, we have 18K above our expenses and bulked up emergency funds, and if my husband makes any money with consulting, we will have that additional income as well (it’s an unknown).

    So now we’re wrestling with how much to put away in the 529 vs. how much to put away in our additional tax-deferred retirement accounts and mortgage, both for next year and for the uncertain future.

    More details:

    • mike says 04 April 2013 at 10:20

      See my note comment # 29. Fund your roths first after any matching 401k %, if need be you can take contributions out tax or penalty free. Unless your more comfortable and want to be debt free.

      • nicoleandmaggie says 04 April 2013 at 18:26

        It’s a bit more complicated than that. And the 12% is including the match.

  12. Phoebe@allyouneedisenough says 04 April 2013 at 06:02

    This is something we’re thinking about a lot lately. We plan on trying to have our first child within the next year and once we have enough saved to buy a house in full (~$300k) we’re going to start saving for their college education.

    But like the poster above, I’m not sure if we’ll use a 529. Right now we’re thinking of saving ~$100k per kid, which they will get no matter what. If they go to an expensive priviate school they can take out loans to pay the different and if they get scholarships they get a nice chunk of change to start their lives with.

    If we go the 529 route, the kid who doesn’t use the money for college gets hit with a 10% penalty. Still 529’s may the the best way to go, I just need to learn more about them.

  13. William @ Bite the Bullet says 04 April 2013 at 06:06

    The principle of starting early, even if it’s small, is universal for all investments.

    I know I may be the odd one out for saying this, but I’m not convinced parents are responsible for funding kids’ college education, especially not at retail rates. My mom told me early on I’d be on my own, which kept my nose in the books to get a good scholarship. That, right there, probably did me a lot more good than if they funded my undergraduate ed.

    I did my Masters part-time, and used a windfall to fund my Ph.D.

    I know I’m not the only one who had to make his entry into life on his own.

    But I also know the heart of parents, who want to do well for their kids. So I’m not saying all parents should throw their kids to the wolves. All I’m saying is I haven’t been convinced yet that it’s a parents’ duty to fully fund any kid’s education.

    • Juli says 04 April 2013 at 09:05

      I agree that parents should not be expected to pay for their kid’s college expenses. But if they can, I think at least helping out is a huge way of supporting your child. If they are failing their classes and partying every night, then yeah, tell them you are cutting them off. But if they are truly trying to get all they can out of their education in order to make a better future for themselves, then I am all in favor of parents helping out. I watch the Suze Orman show, listen to Dave Ramsey when I can, and read several different thrifty/personal finance blogs — two of the biggest things that people seem to write/talk about are how to deal with massive student loan debt, and how to deal with parents who are 70 years old and have a giant mortgage and $50k of cc debt. I am so very grateful that both my parents and DH’s parents were able to fully pay for our college (both of us chose inexpensive routes for getting our education), and they have been financially responsible throughout their lives so we will never have to worry about if they are going to be homeless when they are 80.

    • Honey Smith says 04 April 2013 at 09:09

      I think the reason a lot of parents feel obligated is that (as other commenters have pointed out) parental assets affect the financial aid a child can receive. So if you’re fairly well off, your children won’t get much in the way of need-based aid (even if you never intended to pay for their college expenses).

    • Marsha says 04 April 2013 at 09:57

      I’m certainly not legally obligated to help my sons get through college; perhaps not even morally obligated. But I believe it’s the financially smart thing to do, for the family as a whole. It gives my husband and me better financial security to have children who will have well-paying careers and aren’t saddled with debt. We won’t have to support our grown kids or our future grandkids in our old age. In fact, although we’re planning not to need financial help after retirement, our sons frequently express how they’re going to care for us in our old age.

      We are a family, and what that means to us is that we take care of each other. What one member of the family does or doesn’t do affects all the other members. This is the philosophy with which we’ve raised our sons. Of course there’s no guarantees in life and anything could happen, but we feel that helping our kids get through college gives us all the best chance for future financial security.

  14. sarah says 04 April 2013 at 06:11

    My husband and I have been going back and forth about college savings. He wants to start saving but I feel like it’s more important for us to get our own finances in order and that with a paid off house and no other debts we will be able to contribute a lot out of pocket come college time. I’m guessing it would be better from an aid standpoint too because we wouldn’t have huge savings to disqualify us.

    My parents did not save for my college but they paid off their house and had no debt so that when I went to undergrad they could pay the tuition out of pocket. It was around $3k/year for in-state around 1999-2003. Even though tuition is more now, if you aren’t paying, say, $1000/month for your mortgage, there’s $12k a year you can contribute if you want.

    The other part is that, while I’m all for doing things to lower the cost of tuition and make sure that if people borrow for a degree that the education they get has actual value, I don’t think $24k in student loans is “staggering.” No one has a heart attack over someone spending that much on a car, which is liable to break down and cost you money for gas and insurance, and has to be repaid in 5 years.

    My husband and I each borrowed about 45k to go to top-of-the-line private grad schools (the remainder was paid with scholarships, savings, work study and part time jobs). While it would be nice to not have to pay anything, this debt is not a staggering burden at all (and neither of us is in high paying fields).

    All this to say, I wonder about the real benefits of saving for a kid’s college vs. just being in a financially sound place when your kids go to college.

    • James says 04 April 2013 at 11:02

      This is EXACTLY our approach. My wife and I are not worrying about dedicating specific savings to our kids’ college educations. We’d rather pay off all of our debts (including the house) and maximize our personal savings in such a way as to just be in the financial position to contribute whatever amount we see fit to our kids’ education, if any at all when the time comes. The short version: make ourselves rich, then pay for their educations if we feel like that’s the best decision for them when we get to that point.

  15. Alex C says 04 April 2013 at 06:23

    I have heard that some colleges allow you to pre-pay for college. You can purchase today’s price of college for tomorrow. Although I do not know how early you can pay and the exact rules.

    However, if your kid is a freshman in college and you pay for their senior year of college, that would save about 12% because every year the cost of college continues to increase by 3% on average.

    Pre-paying the education though is a way to save a little bit of extra money for college

    • Martha says 04 April 2013 at 11:12

      A number of states have some sort of program where you pay for future tuition using today’s prices. In Texas it’s the Texas Tuition Promise Fund.
      We told the grandparents that, in lieu of B-day gifts and such, they could make contributions in their grand-daughter’s name. Between contributions from us and them, we’ve got the first year of our 5-year old’s college tuition covered! The fund does not include all of the other college-related expenses (room, board, etc) but it is a good way to help slowly pay down some those future costs.

  16. Abby says 04 April 2013 at 06:57

    One thing that I think is interesting is the assumption that our kids will automatically want to and be able to go to college. It seems like this is just an understood fact in our society. But what happens if your child isn’t interested in pursuing a traditional college education? What if they want to and are able to get a job straight out of high school? What if they want to travel overseas or move out on their own? Maybe it wouldn’t be so bad to diversify savings vehicles, especially if there are penalties for using 529 funds for non-college things.

    I’m not trying to play the devil’s advocate or anything. Heck, I don’t even have children of my own just yet, but I might in the near future, and I’d like to have some sort of savings plan to help them into their post-high school, adult life. It’d be interesting to explore the “saving for a kid’s future” topic from a different perspective.

    • Beth says 04 April 2013 at 08:46

      I think this is an interesting point, and I say this as someone who stresses the importance of a college degree to my children, day in and day out. (I say this because it seems like you need a bachelor’s for just about any job these days, even those that don’t technically need it…)

      For myself, I don’t want my children to start working after high school and return to school “someday.” It is very easy to get caught up in working and never seem to return to school. Trust me, I speak from experience.

      • Andrew says 04 April 2013 at 15:02

        We’re at a point where Associate Degrees and Trade Certifications are a better ROI than most Bachelors degrees. I know many young people who have found this out and are making $75,000/year two years out of high school in the trades.

        While like you, I stress the importance of higher education, unfortunately I think society (universities perhaps) have told us the BS/BA is the only way to go, when it’s simply not true.

    • Kat says 04 April 2013 at 11:43

      @ Abby, very good point. I quickly learned that college was not for me and stopped going after wasting about four years (working part-time, taking part-time college credits). My parents also clubbed in about 10K in loans, of which they didn’t get any sort of return (since I did not finish with a degree/certificate). While I feel bad that they made a fruitless sacrifice on my behalf, they were also the type to say that the only path after high school is college. Granted, while degreed folks have better luck in careers, I found my luck the way of hard work, networking and proving myself.

    • Kay says 04 April 2013 at 13:40

      I definitely agree. College isn’t for everyone.

      Do 529s allow people to use the funds for post-secondary education of any type? Such as a trade school or vocational education? I would say that for *almost* everyone, some type of additional education after high school is necessary, but it’s not always in the form of a bachelor’s degree.

      • Chelly says 06 April 2013 at 18:26

        I looked into this recently and the funds in a 529 can be used for almost any type of schooling, including vocational schools, community colleges, even semesters abroad if the program is affiliated with a school. You can also use the money for books, room and board and even technology, like purchasing computers.

  17. Michelle at Making Sense of Cents says 04 April 2013 at 06:59

    We don’t have kids yet, but I do know that I would at least like to help them some with their college education. It’s so darn expensive!

  18. SDO says 04 April 2013 at 07:38

    There is also the option of having your high school aged children take CLEP and/or DSST exams for college credit. Each test, with proctor fee, is only about $100 and will give you between 3-12 credits (1-4 classes) per exam. Your child can be graduating with an associates degree at the same time he/she is graduating from high school. That greatly reduces college cost. And to sweeten the deal, three regionally accredited schools (the gold-standard of accreditation) accept all transfer credit credit except for literally 1 or 2 classes. Two of those are state colleges: Thomas Edison State College and Charter Oak State College. The third used to be a state school but is now private: Excelsior College. With any of these three you can have an accredited bachelor’s degree for less than $6000 and in a lot less than 4 years.

  19. SDO says 04 April 2013 at 07:45

    For those who are in need of inexpensive college credits, New Mexico Junior College and Clovis Community College offer a wide variety of college credits totally online and their out-of-state tuition is dirt cheap. For example, out-of-state tuition for a whole semester at NMJC is $720 maximum and you can put that on a payment plan. NMJC has 16 week semesters and 8 week mini-terms so you could take 12 credits in one mini-term and 12 credits in the next mini-term. For that one semester you have earned 24 credits (almost a year’s worth of college credit) and it only cost $720 in tuition plus a little more in fees (less than $1000 total). Combine that with CLEP and DSST and you’re looking at a very inexpensive, very quick associate’s degree.

  20. mike says 04 April 2013 at 08:41

    Couple Notes After Reading Posts:

    -The Biggest Factor for most parents and students will be income. If you haven’t done it, do yourself a favor go to or some other site do the simple EFC (expected family contribution) and college tuition calclators based on age. You can play around with some of your financial #’s. If you make a decent salary your EFC will be very high regardless of savings. Which also means your child probably will not qualify for subsidized loans so if you don’t co-sign they won’t be able to get loans in many cases.
    -I’m hearing many people trying to determine best course with 529s and if they should worry about funding kids colleges at all or if college is even the correcte road. Make sure you are getting your match on 401ks, funding Roth IRAs prior to 529s since contributions can be removed without penalty after that you have to determine is it better to pay off mortgage to have free cash flow or have savings set aside. Truth is no one knows what future legislation will bring. Currently the fed formula does not penalize you for having no mortgage but college formulas may expect you to take a loan on your home when considering you EFC.
    -Certainly there are ways to reduce your college costs but if tuition increase continue at their current pace you local state school at 12k a year (prob 3k 20 years ago) will cost close to 30k a year in 16 years. So you need to be realistic based on your time frame. Yes students can go to CC for 2 years and matriculate, ap classes, work a little, work study etc., but their debt burden is going to continute to increase. The 24k debt balance is only an average for 2012 grads and it has been escalating rapidly what do you think it will be in 16 years. Also as an average it means a lot of kids have 50-100k plus in loans, moreso now than ever. These averages often times dont include the credit card debt kids have on top due to books, fees, etc.. or the cost of room and board.
    -Here is the harsh truth, students with affluent parents will be okay and have limited loan balances and students from poor to lower middle class will get plenty of grants and heavily subsidized loans, also with the new legislation in place be able to probably have loan forgiveness based on income after a certain amount of time. Solid middle class and upper middle class families are going to get the squeeze, of course it will depend on income, savings and # of dependents you have to see where you fall in future formulas.
    -Whether your kid goes to college or not shouldn’t matter, maybe they will get a technical degree or be in a field that doesn’t require a college education, that shoudn’t stop you from saving even if you decide to use Roths or any other accounts instead. Remember your 529 will be assessd at the parents rate and contributions removed will not be assessed at federal tax penalty only earnings if not removed for college. The key is too have options. If your kids are young you really have no idea what they will do or what choices they make. The more options you give yourself the more they will have. Of course there has to be an individual responsibility component for them and they need to take ownership of their goals including from a financial aspect. I personally don’t want my child options to be severely limited because I choose not to think and plan ahead and yes life does get in the way, but I rather overplan then underplan. It wasn’t the same when I went to school 20 years ago I was able to work and pay for school as I went on $6.50 an hour, it was doable. Now its extraordinarily difficult, in 20 years it would be impossible.
    -If your looking at specific 529 plans or plan info you can’t get good overviews from money mag and kiplingers mag online. They usually rate the best yearly based on costs. You have to look at your state incentives some have none, others have some if you use a state plan, the best in states like PA that give you credit for using any states plan.

  21. Emma | iHELP students loans says 04 April 2013 at 08:43

    “It doesn’t have to be all or nothing” – exactly. Another possibly comforting thought: eventually, college will become so expensive, that market forcers will work to lower prices, possibly when fewer people attend college and fewer employers expecting a college degree. It’s also important to remember that often, the sticker price doesn’t reflect the actual cost, once grants and scholarships are taken into account.

    • mike says 04 April 2013 at 10:30

      -Actually I don’t find it comforting at all to put my or my childrens futures into others hands or what might possibly happen. Statistics have shown that employers are now requiring degrees for jobs that have not typically required degrees such as receptionist, clerks, office jobs, etc.. That’s why the unemployment rate for high school graduates is ridiculous. I don’t think market forces are going to do much, there might be some leveling off, but your not going to see much of a decrease from current high costs. Furthermore since most of the jobs that used to not require a college degree have either been outsourced or streamlined due to productivity, with low GDP growth predicted for a long period of time, I can see this to be a long term trend as most of these jobs aren’t coming back.

  22. Jenny @ Frugal Guru Guide says 04 April 2013 at 08:49

    Prepaid college plans are outpacing just about every investment these days. In our state, you can use them either at any public university OR you can take the average cash value and apply it to any college, anywhere. We have one for each kid!

    • imelda says 05 April 2013 at 12:18

      What is average cash value in this case?

  23. Juli says 04 April 2013 at 08:56

    I personally think that the cost of advanced schooling is going to have to level off at some point. If the costs continue to increase at the rate they have the last few years, then at some point, it is going to be impossible for anyone but the very top to go, and that is not going to be to the advantage of the schools themselves.
    My boys are currently 2 and 4. We just recently opened up a 529. We only have one right now, since it seems silly to me to be paying the fees for two accounts when we won’t be using it for many years to come. Eventually if the older one doesn’t go to school we can change to name to our younger son. Or if they both go, then later on we can open a second account in his name. We will not be able to put much in, our main reason for opening it is so that the grandparents can occasionally put some in rather than buying as many presents.

  24. Jenny @ Frugal Guru Guide says 04 April 2013 at 08:57

    If you are low income, however, you shouldn’t have anything. Not a PENNY. Every cent you save for them reduces financial aid by that amount. So if you are middle-middle class and won’t qualify for grants and need-based scholarships, save like crazy! But if you have a ton of kids and/or are at the low end of the income range, saving a little bit isn’t going to help your kid because it’ll come out of the grant side of his package rather than the loan side.

    • imelda says 05 April 2013 at 12:24

      Yup. In college, I had to take out ~ $6k per year in Stafford loans, and my expected family contribution was about $800/year. The rest was needs-based grants.

      One year I won a scholarship for ~ $2k. I enthusiastically submitted the award letter to my financial aid office, only to find out that they deducted the ENTIRE amount from my GRANT. I had hoped to save myself some of that much-needed $800 (I paid from summer jobs), or at least cut back on loans. Nope.

      I still feel like I was robbed. 🙁

  25. Honey Smith says 04 April 2013 at 09:17

    A couple of notes after reading this:

    1) I personally would not describe my debt as soul-crushing. Irritating and inconvenient, yes. Soul-crushing, no. However, I got a job before I even graduated that enables me to make my monthly payments. Had that not happened, I am sure I would feel differently about it.

    2) I am SHOCKED that neither Holly nor any of the commenters have brought up trade school as a way to avoid the costs of a university/college completely. While trade schools have costs of their own (and I’d LOVE to see an article on that! I have no experience, but maybe there is a Reader out there who can submit their story?), it seems to me the ROI is a lot better if you choose your trade strategically. Additionally, the ROI is only going to get better as more and more people get four-year degrees and the demand for tradespeople goes up (just as supply goes down).

    • Holly Johnson says 04 April 2013 at 09:41

      I would love it if my kids went to trade school or community college. If they did, I could probably pay for all of it. Since they are just toddlers, we aren’t talking about their future education goals quite yet. =) However, when the time comes I will definitely urge them to work toward a degree that will pay for itself easily. I can only hope that they will listen!

      Luckily, money saved in a 529 can be used for trade and technical schools, should they decide to go that route.

    • Lisa Aberle says 04 April 2013 at 10:24

      Honey – good thing you brought this up. I started my career by going to a trade school. It has paid off in many ways. Out of curiosity, I just checked tuition at similar trade schools. Tuition ranged from $500-$4000 a year. For two years, that’s a good deal.

    • Johanna says 04 April 2013 at 10:36

      I think it depends on how you view student loans. I am paying them off as fast as possible, and I will view them as ‘soul crushing’ until they are gone. But I know a lot of people that are perfectly fine taking the full 10 (or 20 or 25) years to pay them off.

  26. payMyOwnWay says 04 April 2013 at 09:52

    I am not relying on any student aid for college tuition or any social security benefits for retirement. I am planning to pay my own way for my family when taking into account how much I need to save. Instead of trying to guess how much handouts and borrowed money you will get from your government, I suggest this route to make it more easier on yourself. For the ones that say it is hopeless and that they can’t save a penny, don’t worry, I will be paying for you.

  27. Jake says 04 April 2013 at 10:22

    It’s pretty crazy to do the actual calculations on how much your child will probably need which is why it’s great to start small.

    I’ve already determined we’ll probably pay for around 1/2 of our child’s education and I’ve estimated this to be about $150 a month per child if that increases at 12% a year and college costs increase at 4% a year. When you break it down like this it’s not so bad, but these numbers get a lot higher if you don’t start right away.

    Nice article!

  28. phoenix1920 says 04 April 2013 at 11:58

    I invested in my state’s prepaid college plan because although you can use it only in state for a state college or university, my state (and most states) has good colleges and universities so my children will be able to afford college.

    The one thing that I think is really missing from this article is to compare the risks and advantage of different options. The problem with the 529 is I think it is an investment plan. We are all so familiar with investing to save for retirement, but we’re to begin this investment in our early 20s and many do not retire until 65-70–which is FORTY years!! The problem with investing for saving for college is the time period is much shorter since kids are in college within 17-18 years. We are told that when saving for retirement, you need to move most of your investments into very low-risk options between 5-10 before retirement because if the stock market crashes, you won’t have time to recover and will have to postpone retirement. However, there is no such thing for college. You need to begin college right when you graduate college or maybe within a year of it. If you shift to low-risk investments 5-10 years before college, that means you need to make the change when your child is between 7-12 years old, which is crazy in many ways because you can’t save enough within that short period of time.

    I believe that we need to really look at this problem–that we can’t treat saving for college like saving for retirement because the term of investment is too short and parents (and their children) bear too much risk in terms of volatility. We need another option where parents can put a certain amount in and be guaranteed a decent return–in essence, a pool.

    • Matt Becker says 04 April 2013 at 12:45

      Phoenix, you make a really good point that people need to understand the risk involved in their investments. I definitely agree that college savings have a much different timeline than retirement savings, and that needs to be taken into account.

      However, what you’re asking for with a “guaranteed decent return” really isn’t an option. Anything with a guarantee will come at a high cost and/or with much lower returns than what’s possible without that guarantee. Actually, you can basically get this guarantee by investing only in things like CDs, but as you say it’s very hard to save enough for college that way.

      People need to understand the risks involved with investing, but that shouldn’t necessarily preclude them from taking some of those risks. Focus on what you can control, such as savings rate, tax advantages and asset allocation. There are no guarantees, but remember that guarantees come at a cost too. It’s just a different cost than volatility.

      • phoenix1920 says 05 April 2013 at 14:46

        This is the thing I think we really need to change. It is possible for this to occur in a private market setting. Let’s agree that the average ROI in the stock market is 9.6% on a long-term basis (which is what the data indicates from 1926 until 2012). I would be willing to invest in a product that guarantees me a 7% ROI where I don’t need to worry about volatility. This leaves the company with a 2.6% profit margin simply for being the buffer between market highs and lows. If a company did this, there would be times the company was making a killing when the stock market is performing well, but like insurance, it would need to keep that profit safe for times when the market turns low. We simply need to spread the risk, like we do with all insurance products.

        In many ways, pension plans are like this–if a person worked for a company with a lifetime guaranteed pension and the person dies early, the company comes out ahead. Pension plans are great for low-risk investors. The biggest problem with pension plans is that most were created and the returns set up when the life expectancy was much lower and when it rose, the company can end up bankrupt because too many people end up living longer and taking out more in pension payments than they put in (which is the same problem with social security). But the overall concept was good.

  29. Cortney says 04 April 2013 at 12:16

    I think there’s one other thing to add here, which is ways to prevent college tuition from continuing to rise. Especially for state schools, organizing and lobbying your local representatives to increase funding for education may help reduce future costs. When education cuts are on the table, complain loudly. Write to your alma mater and tell them that the increases in tuition reflect poorly on you, and you’ll only donate money once the tuition increase is under some percent. It takes a lot of work, but as long as universities can get away with skyrocketing tuition and lawmakers can cut education budgets, they’ll have no reason to stop.

  30. Rhonda Thomson says 04 April 2013 at 13:37

    My husband and I have a credit card through Fidelity Investments that offers a “reward system” based on spending, much like a Discover card that gives you a percentage back. However, instead of sending us a check, the monies are deposited into a Fidelity-managed 529 account for our son.

    For us, people who pay off the entire balance every month, this works great. We charge our utility bills, groceries, gas, everything we would pay for anyway. Meanwhile, our son’s account keeps growing.

    We save money for our son’s education in other ways, as well. This account, however, just feels like “free” money!

  31. Rhonda Thomson says 04 April 2013 at 16:56

    This link will take you to a site that answers many of the questions people have been asking about 529s and financial aid, unused funds, etc.

  32. David says 04 April 2013 at 18:07

    Thanks for this post. Perhaps I can get a comment from the financially savvy ones I see in the other comments on what I’ve done to date.

    After exploring some different options I decided to open a custodial account for my son (age 2) that just holds a basic asset allocation with ETFs I will rebalance from time to time. My hope is that 16 years or so from now there will be enough in there for his discretion on either college or, if that’s not the route he takes, a first home.

    Are the tax benefits of the 529 good enough that I should enroll in the state plan? Do 529s have the kind of return I could get on my own with just a broad market based investment strategy?

    On the topic of whether or not to help – I’m sympathetic to the people who said their parents told them they were on their own. I haven’t thought it through completely but perhaps I could keep this whole thing a secret to my son and only reveal it at an appropriate time.

    Finally, how much should be sacrificed for a child to go to an elite school? If the choice is going to “State U” vs an Ivy League, I’ve been biased toward breaking myself for him to attend the latter (I’m an immigrant so this shouldn’t be surprising). My wife (American) doesn’t feel the same way. Can anyone offer insight based on experience, evidence, or anecdote?

  33. @pfinMario says 04 April 2013 at 22:57

    This is such a tough question and I have to start by saying I’m ages away from kids and probably marriage, but even then it’s something I think about.

    I managed to go to a great, inexpensive public school for undergrad. And would like to think I’d be ecstatic to find my kids that lucky. But what about options? What if his or her dream is to go to an expensive private school? Or an expensive private school in another country (that is itself expensive)? Uf… I guess I’ve got time but uf…

  34. Steven J Fromm says 05 April 2013 at 05:45

    This is very scary stuff. Your step by step plan is good one and it will be a recipe for success in funding for college. The problem is in our marketplace. Many recent college graduates cannot find a job and the one’s that can are taking jobs below their qualifications. Many of son and daughters friends are having a real problem here so something has got to give.

  35. Tony@WeOnlyDoThisOnce says 05 April 2013 at 07:23

    Great post, Holly. Would love to see more specifically on tax-advantaged college funds, if you have the time!

  36. mike says 05 April 2013 at 08:46

    Great article, particluarly point 5 about the way the economy is changing and the demand for college grads could potentially be permanently damaged.

  37. Kacie says 05 April 2013 at 14:21

    We also get the awesome Indiana tax credit. I hope it’s around forever! I would like to pay as much as possible toward my kids’ educations. My husband and I both graduated without student loans and it gave us an incredible head start . I don’t think our savings will affect aid, because we probably will earn too much for that.

    That’s fine. And we can use the money for trade schools, which is a great option. If my kids end up getting full ride scholarships, I would be happy to take a 10% penalty and give them money to start their lives. Not a bad penalty to pay if they still got a degree out of it.

    • Holly@ClubThrifty says 05 April 2013 at 14:59

      You summed up my thoughts exactly. Our income and assets will probably be too high to get any help anyway, so I am not counting on any grants of any kind. And you’re right..if our kids get full rides we can still get to our money. We just have to pay taxes on the gains and take a 10 percent penalty. It wouldn’t be that big of a deal since we have gotten the 20 percent Indiana tax credit all along, I think. =)

  38. Heather says 06 April 2013 at 10:52

    Here’s a wrench to throw in the fan: what if your child(ren) decide NOT to attend college? EVER.
    And what IF there isn’t another kid for you transfer the funds to?

    My husband and I have decided we would like to help our kids somewhat, but we dont want them to have it all handed to them either. We are choosing to give them a set amount of money, put into a UTMA. And they can use it for whatever they want. Yes, they could become crackheads and spend it as they wish, but I think I’d rather take my chances, in case they decided college isn’t for them. My kids are 6 and 2 and who knows what the next 10-15 years will bring? They could use the money to start a business, or go to college, or buy a house, car, whatever. But that’s what we’ve decided for us.

    My husband and I both took care of our college — by working hard, spending very little, and he by joining the Army Reserves (yet still some paid out of pocket; he has a nursing degree and an MBA)…and I by getting a scholarship to a state school.

    I’d appreciate anyone’s thoughts, on our choice. (And just so you know, we did start funding a pre-paid college plan but stopped after about a year. My dad did this for my brother and came out like gang busters for his tuition, but that was right before the crash. He got lucky. Our state’s (TN) prepaid plan is now defunct and they offer something else, but at this time we are not going to participate.)

  39. Nick says 06 April 2013 at 18:39

    Financial aid formulas are a moving target. I, for one, am not going to worry if my kids’ 529 balances disqualify them for need-based financial aid. Maybe this taking fair play to an unhealthy extreme, but if the mystical financial aid formulas don’t identify me as a person with “need” I kinda think it’s fair that they help out people who actually do. There are still many, many merit, athletic, and affiliation scholarships out there.

    I’m currently entering year nine of a plan to set aside 50% of a projected in-state tuition for my kids. The kids will have something but won’t be able to coast into the Ivy League. If the kids end up doing something really basic like community college or a trade school, then I guess they have a full-ride from dear old dad. Otherwise, they will have to put some skin in the game. When the kids get old enough to (legally 🙂 ) get part-time/summer work, I plan to introduce them to a 401k-like match that goes into the 529.

  40. jim says 08 April 2013 at 18:04

    Old guy here – put both kids thru college debt-free via 529’s we started while spouse and I were still paying off our undergrad/grad school loans. The scholarships they got helped – a lot – but we didn’t stop there. Even while they were in college we continued to contribute to 529’s for our grand babies – when they were but about a nano second birthed. That’s going to help them a lot ’cause the cost of college is insane. We don’t spoil them with crap toys. We save that $ for their 529’s. Honestly, sometimes it’s hard ’cause we’d like to be the grandparents that buy them the newest, shiniest thing on the shelf, but we refrain. One day they’ll apprecriate that. In the meantime, we play with them and I wouldn’t trade that for all the $ in the world.

  41. Sarah L says 13 April 2013 at 20:33

    We have been saving for our kids too (5 years and 7 months) and of course, the oldest has more, because we would take half of the money he was given for birthdays/christmas and put it into savings, as well as $10-20 a month from us but instead of the 529, we have just been doing a general fund because while we hope, and want him to go to college, we want him to make that choice, if he needs or wants the money for something else, he won’t be restricted, example: Missionary work, vehicle, down payment on a house, or, wedding.

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