Saving for your child’s education is one of those tent-pole parenting issues, but I am noticing that parents don’t really talk about it in polite conversation.
My social circles certainly discuss their concerns over the ever-increasing costs and “what it will cost when our kids are in college“. Honestly, I don’t like to think about it. If I wasn’t writing this article, and I saw this headline, I would skip right over to find out what brand of honey Jessica Alba feeds her kids (okay, that is probably a stretch).
You can find a massive amount of advice online. So we are clear, this article will not give you advice on saving… because I don’t know what I am doing… but I do want to have a conversation about the options.
When I talk to family that have already put a kid or two through college, the most common advice I get is to start a 529 plan:
Since parents fund it with post-tax dollars, you don’t pay tax on the potential earnings you make when you withdraw money in the future to pay for tuition.
The issue that has prevented me from investing in a 529 program to date is that there are conditions for use. What happens if your child doesn’t go to college?
If you don’t use the money you invest in a 529 savings plan for college tuition, you will be penalized 10 percent when you withdraw the money to use it for something else. In addition, both your state and the federal government will tax the earnings on your account in your current tax bracket.
Without getting too deep into the topic, I have reservations about how US colleges are currently operating and what their ultimate goals are regarding individual students. Malcolm Gladwell did a great podcast on the topic.
My concern is that perhaps some disruption occurs in the education system in the next 15 years and a viable alternative arises that is not deemed appropriate for 529 use (the rules haven’t caught up with reality yet).
That leads me to think even though the benefits aren’t as good, a simple mutual fund might be the better path (you pay the taxes, but you can do whatever you want). Mint’s Farnoosh Torabi also suggests that an IRA might be a decent option:
But, if along the way, your daughter needs money for college, then as an exception, a Roth IRA can also serve as a means to pay for qualified education expenses. You can withdraw your contributions (not to be confused with your investment earnings) from the account at any time tax and penalty free.
If your daughter doesn’t end up needing money for college, then that’s no problem. The Roth can go on to serve you in retirement still.
I frequently hear people say “you can’t worry about it, that is what loans are for.” I just don’t think it is healthy to strap tens of thousands of dollars of debt to someone just starting out their life if it can be helped.
The expected average cost of a public college 4-year degree in 2030 is $205,000. In a time where 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account, the idea of saving even a fraction of $200k can be daunting.
I feel fortunate to be able to put aside some money every month for college. I don’t know what the right long term solution is, but it helps when real people in similar situations (not talking heads on youtube) discuss their ideas and methods.
Does saving for college keep you up at night? How did you save or plan to save?
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