It's funny how timing works. We started reading Dave Ramsey's Total Money Makeover in January 2012 and our daughter graduated from college in December 2011 so while reading the book I actually skipped this chapter because we didn't have to worry about saving for college. I have since gone back and read the chapter and, as usual, Dave offers some interesting insight regarding college education. First is that having a college degree does not ensure wealth. This is so very true. Look at the late Steve Jobs and Facebook founder - neither of them have college degrees and both were billionaires. Like everything else Dave recommends up front paying cash for college. If you can't pay just cash then a combination of cash and scholarships is the way to go. Unfortunately I doubt the vast majority of people these days could pay cash for college. Oh wait, we did with Steffanie :). We paid all of her tuition and books without taking any student loans. I'll be the first to admit that it was quite a struggle for us to get through it though. I had to reduce my 401(k) contribution from maxing it out down to 10% and I wasn't happy about doing that one bit! Even though we no longer have to worry about putting children through college Donna and I recently found out we're going to be grandparents later this year so suddenly saving for a college education became a topic of interest to us. So let's have a look at what's out there and what Dave recommends we do.
Education Savings Accounts (ESA) were created for us to save money towards a child's education expenses. Dave recommends if you open one that you invest your money in a growth-stock mutual fund. He'll also tell you to invest in one that averages an annual rate of return of 12%. Good luck finding one of those! If you do please let me know about it. You can put a maximum of $2,000 per year ($166.67 per month or $83.35 per pay day) into the account. While $2000 per year doesn't sound like much if you invest $2,000 per year for 18 years you've socked away $36,000 not including interest earned. I know for us that would have paid for all of Steffanie's education. Heck there may even have been enough left over for her to get her Masters. Granted $36,000 won't come close to putting your child through Yale or Harvard but it would put them through a local state college. Steffanie and I for that matter have our BS degrees from Macon State College in Macon, GA. Sure I would rather have my BS degree from the University of Georgia (Go Dawgs!) but I got my degree by going to night school while working full time so going to UGA wasn't really an option for me.
Another college savings plan is the 529-plan. These are state based plans and should be investigated thoroughly before you invest in one. In our case it makes no since to invest in one because our son Terry, the one that will become a father later this year, is serving in the Army and is currently stationed in Washington State. I know for certain that he will not end up staying in Washington state so there's no reason to expect that his child would later return and go to college there.
I have to be honest and say I'm not really a huge fan of ESA's. Not because I don't think it's important for us, as parents, to help our children get a college education. I think if we are able to then we should help as best we possibly can. Consider this scenario though. We open an ESA for our future grandchild and deposit $2000 per year from its birth until turning 18 ($36,000) investment and this child decides they want to follow in their father's footsteps and go into the Army upon completion of high school. What happens to the money? You have a couple of options: (1) You can do nothing and upon the child reaching the age of 30 the money is given to them. Okay that may not be such a bad thing but what if that child is a drug addict or something like that. Would you want to just hand $30,000 to someone like that? (2) You can transfer the account to another child as long as that child is under 18. This seems like the best option if the first child does not plan on going to college. (3) You can withdraw the money yourself but of course there are penalties you'll have to pay for doing so.
Donna and I are undecided about what we want to do to help our future grandchild. One idea is to open an ESA for the child and hope that 18 years from now the child does plan to go to college or we may just earmark $2,000 of the money we put into our Roth IRA as money for that child's college education. Fortunately we have a few months to make a decision.
Oh here's a little fact about ESA's that I'll bet you didn't know -- you don't actually have to wait until college to use the money. Education expenses incurred in grades K-12 also qualify. So say for example your child is required to wear a specific uniform to school. The cost of those uniforms could be paid for using ESA funds.
So what about you? Do you have children that you're saving for their future college education? If so are you using an ESA or 529 plan or something else?
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