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Our tech team has launched updates to The Nest today. As a result of these updates, members of the Nest Community will need to change their password in order to continue participating in the community. In addition, The Nest community member's avatars will be replaced with generic default avatars. If you wish to revert to your original avatar, you will need to re-upload it via The Nest.
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BR: Saving for college
What plan(s), if any, do you have in place to help fund your LO's college education? When did you set it up and what's your strategy for funding it (e.g., monthly or lump sum contributions, directing monetary gifts there, etc.)?
We're looking into the 529 college savings plans and hope to automatically contribute a set amount each month. Just wondering if anyone has any other advice on the matter... seems like there are lots of options.
TIA!
Re: BR: Saving for college
There are SO many options.
We had some money we wanted to contribute right away - monetary gifts for his birth that we felt needed to be put away for him specifically right away. Our state does the guaranteed tuition type 529 (buy tuition credits at "today's rate") so we plan to save 4 years worth of college through that and then open another account (still deciding about that one) to save for other expenses and grad school if they want it. DH's parents paid for all of his education (undergrad and out of state grad), mine paid for most of my undergrad but no grad. We would like to pay for both if the child wants it. It's so nice that DH doesn't have any loans.
We don't do a monthly contribution right now, we will start to do that when my loans are paid off. However we already have (and plan to continue as finances allow) added lump sums when DH got a larger than normal paychecks thanks to a case finally settling or someone finally paying their year+ legal bill.
Our parents/grandparents also have payment books and plan to add a little money I guess.
there are a lot of options. it depends on what kind of flexiblity you would like.
529's are exclusively for college and tuition expenses. investment options are limited. 300k max contribution. contributions and distribution are tax favorable.
coverdell's/esa's can be used for primary and secondary education. can also be used for books, living expenses, tuition. income has to be under a certain limit to contribute. 2k max contribution/yr. no limitation on investment options. also tax favorable.
custodial accts are the most flexible. no limitations on investments. money is not designated for college (what if your child doesn't go to college). no income limitations or contribution limits. anyone can contribute to the acct. once the child reaches age of majority they are free to use the money as they please.
you'll want to take financial aid into consideration...some of these will count against the child and will be assets in their name.
i always tell my clients to make sure their retirement is squared away first (maxing out in all employer plans and ira's) before thinking about a child's education. education can always be financed, retirement can't.
Oooh, please send me the info! Sad, but I was totally thinking of investing in another state's plan. I don't have much faith in HI's one...
Does anyone know if HI offers a pre-paid tuition plan? Is it worth going that route if you're not sure your child will use it? DH and I both went away for school and really hope our child explores other options, too.
Great insights... thanks!
And very good point on the retirement... we both max ours out, so we'd only contribute to the college fund what we can afford after the fact. But can you ever have enough socked away for retirement?!
This is huuuuuge, and the reason why retirement is a bigger focus for us than college savings.
Then again, our situation is a bit different because we're still not sure where we'll be (USA? Australia?) when our kids hit college age - what country we're living in will make a huge difference! So if we do move to the USA in a few years, we'll probably start saving then - but honestly, I seriously doubt we'd be able to save enough to fully fund both their college educations.
I'm glad you posted this because we just had this discussion the other night. We plan on researching the 529 plans as well as other options and beginning to save pretty soon after she is born.
Honestly, MH and I are just hoping to pay off our OWN educations before our LO goes to college! I'd like to start a plan for him, but we'd rather more aggressively pay off our student debt first. (I have a bachelor's and master's degree to pay off, and he has medical school.) Then we'll see....
And I do agree that we're working more aggressively on our retirement funds first. It just makes sense to me. Whether our child had to take out loans for edication, or we do, or a combination, at least that's a possibility. Loans for retirement aren't.
to build on the 3 options Tanya outlined - here are some of my notes from a vanguard seminar about planning for babies
529 plans - you can contribute up to $26k (in 2010), dollars in are after tax, but have tax-free earning, come out income-tax-free. my money, not child's. can use up to 5 yr of gift tax allowance up front => can put more than $26k into 529 up front. money must by used by age 31 for child who is named as beneficiary. however, can transfer funds to child's sibling. if no one in household to use it for, can pull money out, will pay tax on growth of money you pull out, plus 10% penalty - if have roughly 8 years of tax deferred growth, the 10% penalty is covered, same as if was in taxable account all along
coverdell esa - can contribute up to $2k/yr, has income constraints (ie, you may not qualify to contribute if you make too much money).
custodial account - gives money to child, least helpful when it comes to fin aid. subject to "kiddie tax" - if too much income generated in this account, taxed at my tax rate, not child's tax rate. least attractive of the 3
here's a college cost calculator where you can use a specific school's cost and get a ballpark figure of how much you'll need to save by the time your child is old enough - link
just to give you an idea of what's needed - assuming 6% return and 6% annual college inflation rate, if college is $19k/yr (eg: state school), you need to start saving $500+/month from the time the child is born. For $53k/yr (eg: ivy league), you need to start saving $1400+/month. (Those figures are higher, of course, if you don't start saving until the child is older)
also don't forget to look into an FSA for dependent care - you can contribute up to $5k/year, pre-tax, to be used for child care (nanny, daycare, etc). also subject to income limits and spousal income.
and of course there's the regular medical FSA too, which is also pre-tax money, up to $3k/year, for doctor's co-pays, etc.
and an interesting stat - for ppl in $70-$100k income bracket - average cost of raising a child to age 18 is $291k, not including college education. (32% is housing, so cost of additional children are probably incrementally smaller). eeps.
OMG I think I just had a heart attack...how the heck are we going to afford $500 per month. YICKS!!! It cost my parents $5K per year for UC Davis....can't believe how much tuitions have gone up in 15 years...$19K for a state school WOW.
ack! didn't mean to say that all state schools are $19k! that was just a rough estimate from the vanguard person who gave the seminar. it's probably less if you're in-state v. out of state
that said, I have no idea how much college is these days, or will be in 18 years - i'd play around with that calculator I linked to (which I haven't really done yet). you can actually pull up UC Davis and get an estimate to see how much it will be by the time your baby is college-aged. sorry to scare you!
Since we're starting our family as "older" parents we've been advised to focus on our retirement and not worry about college savings. J and I are the first in our families to even go to college...we didn't have college funds...we paid for it ourselves with loans, grants, work-study and working part-time. I don't necessarily want our kids to have to do all of that...I'd prefer for them not to have debt from college. But I am not opposed to them working part-time while they're in school. Every student I know who had a "free ride" in college were very irresponsible (partying, skipping classes, etc.). It also helps to gain some sort of work experience while getting one's degree so there's something on the resume when they've graduated and are looking for a job.
So our plan is to just assist them when the time comes. We've talked about it and we'll probably be able to afford for them to go to a state college/university. If they want to go to a private school we'll have to talk about it. Personally, I think an undergrad degree should be gained as cheaply as possible and save the investment for graduate school or a professional degree.
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I know - scary huh?
I know lots of people don't like the guaranteed tuition program but for us it works and it's really easy for other people to understand. For example DH's grandparents can go around saying they paid for one quarter/semester - they like the instant gratification/easily quantifiable amounts. The money can be used at out of state and private schools but it will only be worth whatever the going rate at the most expensive state school is at the time. BUT our kids better want to go to UW
(my school)
It's sad that they probably won't really have the choice to go to an out of state or private school just because of money, but it's a choice I had to make when I got into 2 very good schools that we couldn't afford and my life turned out just fine
And good point about retirement - we both save for that and right not the education fund is just for bonuses or money given to us for Jack. When my student loans are paid off the plan is to just start throwing that money towards our kids' education since we will be so used to that payment anyways.
The FSA will be limited to $2500 beginning in 2013. This is stipulated in with the new health care reform. Beginning in 2011, OTC meds will no longer be reimburseable unless you have a doctor's script.
Impact of Health Care Reform on FSAs
Beginning in 2013, annual Health FSA contributions will be capped at $2,500. This contribution limit will increase each year, starting in 2014, as it is adjusted for inflation.
http://www.bankrate.com/finance/insurance/how-health-care-reform-changes-fsas-hsas-1.aspx
http://www.nytimes.com/2010/04/17/health/17patient.html
My employer caps contributions to $5K, which if used for medical and dependent care can be eaten up rather quickly. With the govt. lowering this amount to $2500, I imagine all of it would probably go to dependent care if we have Libby in daycare even partime since that would amount to about $208/month available. I am very much in support of health care reform, but this action has saddened me. I think it will squeeze many middle income families. I know we've been using our FSA for all of Libby's co-pays as well as for things that aren't fully covered by our insurance like dental work and eye care. With our tax bracket and this new change we're looking at our health care costs increasing about $700/year just from the lost tax advantages of the current FSA laws.
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I couldn't have said it better, Lori! Both Brian and I did not have college funds. I applied for every scholarship under the sun, got a student job and worked every summer (career-related internships) until I graduated. Granted, I didn't go to a fancy mainland/private institution, but I can say that I walked away with my degree, completely debt-free. This really helped me have a fresh start as I began my career and started a life with Brian. Brian actually paid his way through community college, earned an Associates degree and, through a fortunate turn of events, ended up getting a job at a local private university. Since he worked for the university, he ended up getting a HUGE break (80%) on tuition to earn his Bachelor's degree. We both feel fortunate that we earned our degrees by going down these paths.
good to know, i haven't been keeping up with this. sigh.
Yes, we opened the 529 before Kaya was born. You can designate yourself as the beneficiary and then change it once you get the baby's social security number.
We also made sure to get our life insurance done before she was born. You should definitely look into it. Plus, the younger you are, the better your rates.
DH's grandparents bought him savings bonds for every special occasion and we cashed them recently -- geez, nearly paid for half of our wedding! It was really amazing how they added up. I wonder if the interest rates are any where near where they used to be.
I agree that helping fund your own education is a great learning experience.
For us, it's important to try to provide our child with at least the same opportunities we had -- and given the changing times and escalating costs, I think our plans will be different than our parents'.
I was lucky to attend a pricey private university entirely on financial aid and a small student loan, and my grad degrees were 100% funded through fellowships. DH's parents helped a little with his college (state school) and then he promptly paid off his loans upon graduation. Because we have modest assets, our child won't get the kind of help I got and, with the skyrocketing price of tuition, the parental help DH got won't go very far for our own child. So here we are...
It's rough being in the middle class --- too well-off to get much help, and not nearly wealthy enough to easily afford it. I can't believe college savings are at the forefront of our mind, and our little boy is just 22 days old!!!
UW is a great school! It's such an advantage to live in a state with a premier public university system.
We opened a 529 account in MD at the end of 2009. My husband did a bunch of research into college funds and we decided to do MD because you get a tax credit up to $2500/year for contributions. So, with that in mind, we were sure to open it by the end of 2009 and put at least $2500 in it!
We have already put another $2500 in it this year and are adding $50/month because I think you had to do something monthly so we figured why not. Our goal is to put $2500/year minimum but hopefully several times that amount.
I agree that paying for college helps to make you appreciate it more. But I would, respectfully, add that my tuition at an expensive private school was totally paid for by my parents and I went to class and studied and got good grades! I partied too, but you know.
Anyway, I have always seen the fact that my parents paid for my education as one of the most amazing gifts they could have given me. Because as friends of mine struggled to pay down student loans, I was able to start my adult life with no debt. I was free to do what I wanted job-wise (take a low paying reporter job) without having to make enough to pay loans. So... If we can... I'd like to give our children that same gift. OK, said my piece. :-)
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I don't have kids - but here's what my parents did: from the age of 2 on, they put 400$ into an RESP for me (registered education savings plan) - the gov't matched it, and when I got to uni, I got about 1000$ a year back.
It paid for my books, anyway... not much else.
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this. minus the no debt part now that I'm completely done, I did have to take out loans for living expenses and summer school for grad. their gift of undergrad let me choose to go to law school without financial worries and they don't have much money to begin with (like pp's worries they had just enough for me to not qualify for aid but not enough that they could just pay for it no problem). I appreciated school, worked hard, went to class, and only partied a normal amount. I worked as an after school nanny in order to have spending money/sorority dues/parking but that was mostly because I wanted something fun to do. My sister doesn't work (during the school year) while she is currently in school because she is easily overwhelmed and anxious and my parents want her completely focused on her studies.
I think it goes both ways - one of my really good friends (sorority grand little sis) had no family help and felt obligated to work - A LOT. So much that it interfered with her education to the point that now, 7 years later she is still plugging away at it.