My husband and I were both blessed with great educations provided in large part by our parents, and we want to provide the same for our children. But saving for college isn’t as simple as opening up a savings account and socking money away in it.
Here are some of the factors you should consider when deciding how – and how much – you should be paying for college:
1. Saving for Retirement vs. Saving for College
This is usually the big issue for parents, since most of us have a limited amount of money to direct into savings. The bigger problem with this issue is the fact that there’s really no such thing as too much retirement savings, and so following the typical expert’s advice of saving for retirement first would have you putting all of your savings into retirement and nothing toward college.
There are no easy answers when it comes to this issue, and it’s one I personally struggle with every year when I consider our financial goals. My solution has been to strike a compromise between all of our priorities: a good amount of money is put toward retirement, some money is put into a tax-advantaged education savings account, and the rest is put into “regular” (i.e., taxable) savings. We do pay more tax on our savings, but since we are saving not just for college but also likely for private middle and high school, it’s a price we are willing to pay.
What’s important here is not a one-size-fits-all solution, but that you are aware of the balancing act that needs to be performed, so you don’t short-change your own retirement by saving for your children’s education. You won’t be doing them any favors by saving them from student loans if they have to take care of you financially in your old age.
2. Invest early if possible
As with retirement savings, starting early makes a huge difference because of compound growth. So even if you can’t invest a lot of money into college savings, once you’ve decided that you do want to pay for at least part of your child’s college education, open a tax-advantaged account like a Coverdell Education Savings or 529 account and start saving something.
3. Have a plan for your child’s income
Most kids receive monetary gifts throughout childhood, and as a parent, you have to decide what to do with their money. You could, of course, let your child spend the money. Or you can put it in an account in their name, which usually is a UTMA/UGMA (Uniform Transfers/Gifts to Minors Act) account. That’s a trust account that the child has full access to when he or she turns 18. Alternatively, you can put the money in a tax-advantaged account like a Coverdell Education Savings or 529 account.
Many parents use gift money to teach their children management skills by directing them to save a portion, give away a portion, and spend a portion. Just know that every choice has consequences – for example, any money in a UTMA/UGMA or a tax-advantaged account will be considered if your child applies for need-based aid. And, if your child tends to be irresponsible, he or she may spend all UTMA/UGMA money and leave nothing for college, even though that’s what you intended him or her to use the money for.
4. Life insurance for you
Notwithstanding those Gerber Life commercials that talk about using a life insurance policy as a college savings plan, I’ve concluded that Gerber life insurance for kids isn’t worth the money. What is worth the money is term life insurance for you and your spouse.
A few years ago, the projected cost of my sons’ college education was $200,000 to $480,000 apiece depending on what school they attend. If you can afford it, you might consider purchasing enough life insurance to cover not just living expenses until your children are grown, but also their college education costs. Note that if your children are young, you might need a 25-year policy (instead of the typical 20-year policy) in order to make sure they’re covered through graduation.
5. Know what your kids want
College isn’t right for everyone, especially now that it can be so expensive and yet not lead to a job. So talk to your children about what they want. If college is important to them from a young age, that can motivate them to get good grades early on, which in turn can lead to merit-based scholarships for college. On the other hand, if you suspect that college may not be right for your child, investing in a tax-advantaged savings account won’t make sense since you’ll have to pay a penalty to withdraw the money for other uses.
Whatever you do, commend yourself for thinking things through and taking action. You’ll be glad you did when you have an empty nest!