Saving for College

[megumic]

With college costs projected to be rounding $400-500k for a four-year education in 20 years, we keep wondering how we'll ever be able to afford an education for our children, pay off our own lingering student debt, save for retirement and eventually buy a house (forget more sparklies... !)

I'm interested to see how others are saving for their children's college and higher education. Whether you plan to cover the full tuition bill or just contribute -- how are you saving, when did you start, and do you have kids yet?

 

[megumic]

I'll start.

We do not have any children yet, but plan to have our first in the next two years. We opened a 529 educational savings account last week for our as-yet unborn children. While we only put in a few hundred dollars to start, we figured we had to start somewhere!

 

[MustangGal]

We've decided to not to a 529 account, just incase Kyle doesn't want to go to college (it's a pain and has fines attached if they don't use it for college). Instead we started a savings account and are contributing a bit extra to our 401(k) plans. For now we're putting $25 a check into his account, and plan to add extra when we get bonuses, etc. I don't plan to be able to pay for all of his college, kids seem to have more respect for their education when they're footing some of the bill.

 

[Mara]

We also wonder this as well. Part of the list of reasons why we think we're 'one and done'...we're closer to retirement than just starting out.

I also don't intend to pay for all of his college--he may not even go to a traditional 4 year ((trade schools nowadays in some industries are even more worthwhile--depending on where you are at) AND I personally think that college costs are ridiculous to begin with and know a lot of intelligent people who never got degrees who have held various admirable positions in the Bay Area over the last 15-20 years. So for me it's not a given that he'll want to go.

That said... I paid for most of my college years and it definitely taught me more to do that than taking the money from my parents. I also saw a lot of kids whose parents paid for it and they really could have cared less to be in school.

We haven't started anything for our 9mo old yet but we are thinking about it. He does have a savings account that we add into and we put checks that family give us for him into it. But that's it so far... haven't done any real research on it.

 

[DivaDiamond007]

I am married, have a 2 year old son and a daughter due in late January/early February 2011. My husband and I both work out of necessity, but do not earn enough money to save anything for our kids' college. We have our own student loan debt, and while mine will eventually be paid off DH's probably will never be. We also have a 30 year mortgage and some cc debt.

We will also probably never be able to retire. DH has pension/profit sharing through his employer but I have nothing. We have paid into Social Security our entire working lives (and will continue to do so) but SS will be bankrupt long before we will be old enough to collect benefits.

It is an unfortunate situation that I think many working class/lower class citizens are facing and I'm not sure there's anything that can be done to help the situation. Personally, DH and I live within our means, even frugally, and still have very little money to save. We live in the Midwest (NW Ohio) and our area has been greatly affected by the current state of the economy. We've lost a lot of jobs, wages are stagnant and the cost of living continues to go up (groceries, fuel, utilties, property taxes {but not values}, clothing). Just thinking about it makes me sad.

 

[NewEnglandLady]

This is something DH and I talk about fairly often and are not always sure what the best plan is.

We both grew up poor and our families could not afford to pay for our educations. DH went to college at a very young age and managed to pay his state-school tuition by working part time. When he was invited to go to a private college, he turned down the opportunity because he was afraid of going into debt. I did go to a private college and do regret taking out loans, though I applied for every scholarship I could and had half of my education funded that way. I feel like I started life "in the hole", but managed to climb out.

Now that we are on the verge of starting our own family, we've decided we'd like to be able to pay for our kids' tuitions. We don't have debt other than our mortgage, but that is the sicking point for us right now. We want to get started on the kids' future college accounts, but we'd like to pay off our mortgage first. We're torn because if we invest in the kids' college accounts now, that would give he fund time to grow. On the other hand, it means we'll be in debt longer.

We've had several financial set-backs this year, so most of our savings has been put towards re-fueling our emergency account, but I think this is something we'd like to see a financial advisor about because we're stuck.

 

[partgypsy]

Everything I've read personal-finance wise, says for parents to fully fund their retirement and other primary financial goals before saving for children's (college) education. The reasoning is that while children can get scholarships and financial aid for college, there is no financial aid for retirement!
I opened 529s for both my kids. I put a small lump sum in each at the beginning and put birthday, etc money in, but have never started regularly contributing. I feel guilty because my parents paid for my education and I value education and would like my kids to be able to go to college without crushing college loans, but can't figure out how to fund it without sacrificing retirement or some other area. I may end putting $50 a month into each of their funds simply to assuage my guilt, but which would effectively end up paying what - 1 semester of college? ... I was speaking to another couple who brought this up with their financial advisor, and their advisor blithly said, oh well when your kids are going to college just take all the equity out of your house to pay for their college. That doesn't sound so great either.

 

[PinkTower]

If relocation is a possibility, consider the state of Georgia.

We have totally free school, full day, beginning at age 4. There is no maximum income requirement.
Our college tuition is totally paid at any state school, so long as the student maintains a minimum GPA.
We have educated one child and have one to go. The pre-K and college are funded by lottery proceeds. We moved here years ago for DH to attend law school, and the education value is one reason we never considered moving again.

 

[janinegirly]

I think you've touched on a very big topic for most parents and parents to be! Education was heavily emphasized in my family growing up and there was never limitations as to where I could go based on cost - it was simply down to me to get the grades to get into the best school,etc. At the time I took it for granted but looking back I see how fortunate I was and it is a foundation I am so grateful for.

I want the same thing for my DD (who is 2) but as you pointed out projected costs of 400-500K make it tough to do without drastic sacrifices. Yes we have a 529, we both work and save, but realistically that is not enough. We have real estate we've invested in and honestly that is what I'm banking on to finance the bulk of it. I think the reality is in this economic enviornment and rising education costs, people have to get aggressive and creative - and think long term. It's alot easier to plan for with just 1 right now...can't imagine 2 or 3 back to back.

 

[MustangGal]

If relocation is a possibility, consider the state of Georgia.

We have totally free school, full day, beginning at age 4. There is no maximum income requirement.
Our college tuition is totally paid at any state school, so long as the student maintains a minimum GPA.
We have educated one child and have one to go. The pre-K and college are funded by lottery proceeds. We moved here years ago for DH to attend law school, and the education value is one reason we never considered moving again.

California also has a good in-state tuition program. Over 20 colleges, and the Cal State ones are less than $3000 a year for tuition. My sisters both got degrees in CA, one graduated with 3K in loans, the other 10K. Here in Arizona the top percentage of each high school's graduating class can go to a state school for free with minimum GPA requirements.

But, there's nothing to stop the states from changing these programs before the next generation is going off to school

 

[megumic]

Everything I've read personal-finance wise, says for parents to fully fund their retirement and other primary financial goals before saving for children's (college) education. The reasoning is that while children can get scholarships and financial aid for college, there is no financial aid for retirement!
I opened 529s for both my kids. I put a small lump sum in each at the beginning and put birthday, etc money in, but have never started regularly contributing. I feel guilty because my parents paid for my education and I value education and would like my kids to be able to go to college without crushing college loans, but can't figure out how to fund it without sacrificing retirement or some other area. I may end putting $50 a month into each of their funds simply to assuage my guilt, but which would effectively end up paying what - 1 semester of college? ... I was speaking to another couple who brought this up with their financial advisor, and their advisor blithly said, oh well when your kids are going to college just take all the equity out of your house to pay for their college. That doesn't sound so great either.

This is what my parents did. Now they are getting divorced and are in so much debt because the housing market has crashed that they cannot even afford to get divorced -- they practically owe on the house after taking out two college educations worth of equity. That financial advisor is an idiot.

 

[megumic]

Just to respond to some of the comments...

Yes I have also heard we should fund our retirement first and other things second. But how much per month should we be putting away for retirement? And before retirement, shouldn't we have an emergency fund? And shouldn't we stop renting and buy a house before that too? It's so hard to know what to financially prioritize that we have simply defaulted to doing a little bit of everything instead of a lot of one thing. It seems like financial advisers aren't any help either!

Mara, your comment about paying for college makes it worth it -- yes I completely agree. In our talks about college for our kids, we've talked about only paying for grades earned that are a B or better -- anything less than a B are credits that the kids would pay for themselves. While this wouldn't require our kids to pay for their education provided they get grades, it would be motivation for them to work hard. Although, I suppose they should want to work hard regardless of who is paying...

As some PP have pointed out, state schools are far less expensive than private institutions. That is another thing we have considered -- telling our kids we'll pay for state school, anything above and beyond that is on them to cover.

For those who have kids in college or have kids already out of college -- what is your two cents on this?

 

[soocool]

Series EE Savings Bonds!

 

[NewEnglandLady]

Just to respond to some of the comments...

Yes I have also heard we should fund our retirement first and other things second. But how much per month should we be putting away for retirement? And before retirement, shouldn't we have an emergency fund? And shouldn't we stop renting and buy a house before that too? It's so hard to know what to financially prioritize that we have simply defaulted to doing a little bit of everything instead of a lot of one thing. It seems like financial advisers aren't any help either!

Mara, your comment about paying for college makes it worth it -- yes I completely agree. In our talks about college for our kids, we've talked about only paying for grades earned that are a B or better -- anything less than a B are credits that the kids would pay for themselves. While this wouldn't require our kids to pay for their education provided they get grades, it would be motivation for them to work hard. Although, I suppose they should want to work hard regardless of who is paying...

As some PP have pointed out, state schools are far less expensive than private institutions. That is another thing we have considered -- telling our kids we'll pay for state school, anything above and beyond that is on them to cover.

For those who have kids in college or have kids already out of college -- what is your two cents on this?

I'm sure every financial advisor says something different, but I'm a Dave Ramsey fan and his baby steps are to pay off debt (except house) then build the 3 - 6 month emergeny fund, then invest 15% of income into retirement, THEN put money towards college funds, then pay off house.

I think the steps are great, though I didn't really follow them in order...and now I'm wanting to swap the college fund and house payoff.

 

[swingirl]

This is a great topic to be discussed and I hope you all can come up with a good plan for future. We have 2 kids in college and things don't always go as planned. The 4 year degree is becoming harder and harder to accomplish. You can't always plan on having a "smart" kid that will get the GPA to get scholarships. The solid B student whose parents make more than poverty-level income (and are not an ethnic minority) are out in the cold. As far as working part-time? Minimum wage will not get you through college unless you live at home, take the bus, get free books and save your birthday money from the time you are born. My kid's college text books cost $150+ per class which can add up to $750 a semester, most of which are worth $10 to sell back. At $7.50 an hour my DD has to work over 100 hrs just to pay for 1 semester's worth of books.

There are strategies for kids to take AP classes in high school and can get some college credits for free. Or take classes at the community college during their high school summers. That can relieve you of a few more tuition dollars. But that only works for students with high motivation and does take away time from getting involved in enriching activities so it's a trade-off.

We are using a combination of student loans and a home equity loan. The way I see it my kids will either inherit a house worth $xxx, or a house worth $xxx minus their college education. I am not worried about retirement because we have planned for that with 401k's. But I really feel for the people who have their own student loans to pay off and want to start a family.

 

[DivaDiamond007]

This is a great topic to be discussed and I hope you all can come up with a good plan for future. We have 2 kids in college and things don't always go as planned. The 4 year degree is becoming harder and harder to accomplish. You can't always plan on having a "smart" kid that will get the GPA to get scholarships. The solid B student whose parents make more than poverty-level income (and are not an ethnic minority) are out in the cold. As far as working part-time? Minimum wage will not get you through college unless you live at home, take the bus, get free books and save your birthday money from the time you are born. My kid's college text books cost $150+ per class which can add up to $750 a semester, most of which are worth $10 to sell back. At $7.50 an hour my DD has to work over 100 hrs just to pay for 1 semester's worth of books.

There are strategies for kids to take AP classes in high school and can get some college credits for free. Or take classes at the community college during their high school summers. That can relieve you of a few more tuition dollars. But that only works for students with high motivation and does take away time from getting involved in enriching activities so it's a trade-off.

We are using a combination of student loans and a home equity loan. The way I see it my kids will either inherit a house worth $xxx, or a house worth $xxx minus their college education. I am not worried about retirement because we have planned for that with 401k's. But I really feel for the people who have their own student loans to pay off and want to start a family.

This is basically me and my DH, especially your first paragraph. We are working class white people, so if our children are not brainiacs it's not likely they'll qualify for any scholorships. I ran into that when I was a senior in high school. My parents had saved some money for my college education and were penalized for it when it came time to get scholorships and financial aid. I was also a solid C student, which I always point out is AVERAGE. I lived at home all 4 years I was in college and worked part-time except for my final semester, when I was in class from 8am until 10pm 5 days a week. Looking back I don't know how I had the energy or drive!

My parents funded my college with a combo of cash savings and student loans. Most of my loans are in their names and only some were in mine, which is my debt will be paid off and DH's won't. DH has 5 siblings, and of them one got a free ride in a MD/PHD program. His parents could not afford to save for their colleges so the 4 that didn't have a free ride have massive amounts of student loans.

Retirement is another story. As I stated before, DH is able to put money away through his employer and it's a good sum each year, but I have no retirement opportunities in my current position. I really should start putting money away for it now while I'm young (2 but I also feel like we need to put money in an emergency fund first. Ugh. There was a similiar thread in Hangout not too long ago where I said that it seems like every time we get a little bit ahead something happens and our savings is nearly wiped out. It frustrates me to no end At the end of the day I guess I just hate feeling like we've done everything right, but it still all ends up wrong. I just don't get it....we live within our means, have made a serious effort to pay off our consumer debt and have gotten better at budgeting, but it still seems like there's just never enough.

 

[charbie]

I plan on helping my kids as best as I can, but will probably not be able to foot the whole bill. I have no plans to start specific college funds for them, however do plan on turning birthday money/etc. into savings bonds. The way I look at it, I was a good student who got an ok scholarship to a huge state school, and took out loans to fund the rest. Every student in every state is offered loan options, but most people are convinced before even filling out the fafsa (federal aid) form that they make too much money. Sure, yourstudent might not qualify for specific grants, but they will qualify for low interest loans. I know this bc I was a student college counselor in school. It bugged me to no end that people refused to fill out the forms...you HAD to in order to be eligible for some scholarships.
Am I in debt? You betcha. But my $350/mo in loans that will be paid off in a few years was by far worth it to me. I never expected my parents to pay.

 

[soocool]

I plan on helping my kids as best as I can, but will probably not be able to foot the whole bill. I have no plans to start specific college funds for them, however do plan on turning birthday money/etc. into savings bonds. The way I look at it, I was a good student who got an ok scholarship to a huge state school, and took out loans to fund the rest. Every student in every state is offered loan options, but most people are convinced before even filling out the fafsa (federal aid) form that they make too much money. Sure, yourstudent might not qualify for specific grants, but they will qualify for low interest loans. I know this bc I was a student college counselor in school. It bugged me to no end that people refused to fill out the forms...you HAD to in order to be eligible for some scholarships.
Am I in debt? You betcha. But my $350/mo in loans that will be paid off in a few years was by far worth it to me. I never expected my parents to pay.

I mentioned series EE bonds earlier and often wonder why people don't buy more of them. If you purchase them you are limited I believe to $5000.0 per year. Have family give a savings bond in lieu of checks/money. DD starts college next year and I will say this, she has in excess of $100,000 because of those bonds. My parents started saving for me when I was little (series E then) and I am using this money for retirement. When you cash out they are exempt from state and local taxes and may be free from federal taxes under certain conditions.

 

[megumic]

I looked into the ee savings bonds after you mentioned it since I had not previously heard of them. The return rate is not very good -- my savings account is yielding double what the ee savings bond is currently making. I couldn't find out a lot more information than that. Does the rate vary and go higher than it's current spot -- less than 1%.

 

[Blenheim]

Both DH and I graduated with no student loans (I had a tuition/room/board full scholarship and his parents paid for him to go to a state school), and it gave us a huge leg up financially when we were starting out. Our goal is for us to be able to pay for our kids to go to an in-state school. We're in VA, and so there are some great options. We will probably expect for them to pay for anything above that cost, should they choose to go to private school or out-of-state.

We have a 529, in which we're trying to put any monetary gifts to him as well as about $200 a month. Ultimately, we have to prioritize things financially, and I think college savings are less important than some other things: fully funded emergency fund (ours just took an unexpected hit last month) and retirement. It's probably not going to be enough, unless the funds do extraordinarily well, but we're planning on upping contributions once we are no longer paying for full-time daycare. We are also doing UPromise, and have earned like a whopping $.50 since we started two months ago. Haha.

Megumic - As far as how much to save for retirement, Dave Ramsey says 15% of gross not including company matching (once you get to that point in his baby steps); David Bach says 10% to subsist, 15% to maintain the same standard of living that you do currently, and 20% to retire early or well (no mention of before company matching so I'd assume his percentages include it?); and I've read a couple of recommendations of 10% which seems awfully low to me but of course they could be targeting the subsistence end of things. There are also retirement calculators available online. Whenever I run them, it seems like 20% including matching is the right amount for us. I am not the hugest Dave Ramsey fan, but one thing that he says that makes a lot of sense is that it's hard to feel like you're really accomplishing anything when you are putting away a couple hundred dollars here and a couple hundred dollars there and you just see everything slooooowly increasing (savings) or decreasing (debt). He recommends just choosing something and going at it with all of your might, so that you really can see results and get excited about it. And his plans give you the order of things that make the most sense to him, given his values and outlook. I personally care more about getting our emergency fund back up to comfortable levels (which for me is certainly not the $1000 in his baby step 0 or even the 3-6 months in baby step 2; I feel more comfortable with 6-8 months) and saving enough for retirement than I do about our low-interest car loan, and so we will pay minimums on that until our emergency fund is beefed up again. I think that a lot of it just has to do with personal comfort levels. Hmmm, thinking about this more, we should probably suspend 529 contributions until our E Fund is back up. Our savings are all automated, and so I will need to go make that adjustment.

ETA - G is 18 months old and we started the 529 when he was 16 months old, as we were saving for a down payment on a house before then.

 

[Blenheim]

Adding onto what I said about what to do when, financially. (Too much time has elapsed for me to edit the post above.) Dave Ramsey's Total Money Makeover is very readable and motivating, if you just want a point to step off from, even if I don't agree with the order of his steps or his view on debt. I really like David Bach's Smart Couples Finish Rich and/or Automatic Millionaire.

As far as what I would do, and of course everyone's different so YMMV. I would not save for college before you have children, unless you are just swimming in money and don't know where else to put it, and who falls into that boat, anyway? If either of you gets any company matching for your 401k, I would make sure that you are contributing enough to get the maximum match. I would want a healthy emergency fund before buying a house, as houses do have a tendency to be a bit of a money pit, and so I would say emergency fund and then down payment. As far as retirement fits into this, I would just choose a time to start saving your goal amount that works well with your other goals. If you want to buy a house within two years, then maybe aggressively save for your e-fund and then down payment now and put the extra money to retirement on the backburner, but if you just have a vague sense that you would like to buy a house one day, then start saving your goal amount for retirement either now or after you have a good e-fund built up. I believe that money put into a Roth IRA can be withdrawn without penalty (there's a penalty on whatever you make on that money though), and so you could do 401ks to matching and then divide the rest of your savings between an emergency fund and a Roth IRA, using your Roth as a backup E-fund until your primary E-Fund is fully funded. Hopefully that helps? I think the main thing is just to choose something logical and go with it.

 

[Bliss]

Wow, that is a good question and something we're thinking about these days. We're putting our max (tax deductible amount) into our 529 accounts every year and starting a separate savings plan as well. Our parents paid for our private school tuition and private colleges and Lord knows how they did it. As soon-to-be parents, I have a new admiration for them and am so grateful.

Here's what may be a dumb question. If worse comes to worse, can't the student take out student loans? It just seems like such a terrible shame for a child not be able to go to the best school they're accepted into - the loans are low interest and spread out over years, aren't they? Isn't it worth it for the child's education and the job opportunities that come after graduating from a top tier university? Can't the parents just pay off the loans for them once they graduate? They payments can't be that high - at the most, less than a couple thousand per month, no? Of course, this would be a worst case scenario but even that doesn't seem so horribly bleak... does it? It doesn't seem terribly difficult - and the child won't ever have to pay back the loans since the parents would take it over and pay it down as quickly as possible.

 

[DivaDiamond007]

Wow, that is a good question and something we're thinking about these days. We're putting our max (tax deductible amount) into our 529 accounts every year and starting a separate savings plan as well. Our parents paid for our private school tuition and private colleges and Lord knows how they did it. As soon-to-be parents, I have a new admiration for them and am so grateful.

Here's what may be a dumb question. If worse comes to worse, can't the student take out student loans? It just seems like such a terrible shame for a child not be able to go to the best school they're accepted into - the loans are low interest and spread out over years, aren't they? Isn't it worth it for the child's education and the job opportunities that come after graduating from a top tier university? Can't the parents just pay off the loans for them once they graduate? They payments can't be that high - at the most, less than a couple thousand per month, no? Of course, this would be a worst case scenario but even that doesn't seem so horribly bleak... does it? It doesn't seem terribly difficult - and the child won't ever have to pay back the loans since the parents would take it over and pay it down as quickly as possible.

Bliss: Your second paragraph is why DH and I are not overly worried about saving money for our kids' college educations. We both had to take out student loans, and so will our kids. I don't know if we'll pay off the loans for our kids though. We do not have a few thousand extra dollars a month (I wish!) and there is no way I'd refinance our home to accomodate the loans either. Middle class people should never, ever, take unsecured debt and secure it with the one "asset" they have: their home. If you can't pay your student loans or credit cards, etc. there's not much that can be done. If you can't pay your mortgage, you lose your house.

I think the other issue with graduating with a lot of student loan debt is the job market. Right now people are graduating with tens of thousands of loans and can't find jobs that will support even the lowest payment terms. DH and I were both lucky in that we are gainfully employed and each consolidated our loans a long time ago so we're on the extended payment plan and our payments are only around $200 a month total. The flip side of that is that we will pay much more in interest and the loans won't be paid off quickly. Mine will be paid off the year I turn 40, and DH's probably won't be paid off until we're well into our 60's. Our mortgage will be paid off before DH's student loans are!

 

[phoenixgirl]

Some info on 529 plans:

*The penalty incurred if you decide to withdraw the money and not use it for education only applies to the earnings, not your original investment. You can get all of your original money back penalty-free, but must pay taxes and a 10% penalty on whatever it earned.

*You can change the beneficiary to be yourself, another child, your child's child, so if your child does not use any or all of the money, there are options for keeping it as a 529 and avoiding any penalties. It can be used for graduate school as well.

To answer the original question, yes, we hope to be able to pay for our children's college in full. My father was the son of two public school teachers in West Virginia. As they could not afford to pay for his education, he attended the local university and lived at home, then received a full ride to graduate school. He then went on to become a preeminent scholar at an Ivy League graduate school. Obviously he valued education and was confident that giving us what he himself had had to work for would not blow up and make us spendthrift idiots. And his wager seems to have worked out, as far as I can tell. I have not attended graduate school, but my siblings have, and my parents footed the bill for those as well.

It was a true blessing to start off life debt-free with a degree that enabled me to do what I wanted. In fact, it was this fresh start in life that has enabled us to purchase a home and will enable us to save for college. In each scenario we're paying for education in our lifetime . . . the question is for ourselves or for our children. There are pros and cons to each, certainly. I think many of us like to do things the way they were done for us. And I think kids can wind up successful and happy, or lost and struggling, either way.

My uncle is an interesting case-study because he is an entrepreneur who earned a gazillion dollars (literally hundreds of millions) and has several grandchildren whom he has gifted large sums of money to in addition to paying for education. Only one of them has seemed worse off for the money -- never really nailing down a real job, nearing 30 but seeming more like most 22-year-olds I know in terms of maturity and place in life. The others are all quite religious and grounded and seem like they'll be just fine. And as for the ungrounded one, she represents many in her generation, and most don't have the financial resources to fund their Peter Pan syndrome as she, so I guess I'm saying that she may have turned out this way money or no. She just has less debt in this scenario.

 

[ljmorgan]

I think it's great that you're looking toward the future and anticipating assisting your unborn children with their education expenses. I would recommend waiting and putting money toward your other financial goals, and save 529 contributions or other specific college savings until your children are born. It sounds like you're a little overwhelmed by how you should prioritize your financial goals. Several people recommended Dave Ramsey, I think his plan is an easy, great place to start if you're overwhelmed. He recommends emergency fund, debt payoff, retirement, house, college, etc. in that order. I personally do not follow that order, and I would suggest the following.

1. Emergency fund -- do more than the $1000 he suggests you scrape together before paying off debt. Everyone has suggestions (3 months of salary, 6 months of salary) but just pick a number that you are happy with.

2. Retirement contributions -- if your employer offers matching contributions, go ahead and put in the maximum to take advantage of that free money. You'll be earning a 100% return. I suggest taking advantage of this no matter what -- even if you're paying off debt, etc. Don't throw away free money! If your employer matches up to a 5% contribution and you can't put away 5% right now, start with the most you can, and then bump it up 1% every few months or if you get a raise. It really adds up. I started contributing 5% years ago, and am up to 20%. I never felt it though, because I raised it so slowly. Everyone wants to start out aggressively and feels overwhelmed when they can't, but you have to start somewhere, so just jump in. You will get there!

I think that those are the two most important things. Have some cushion, put money towards your retirement and you'll be ahead of most people! After that you can decide to pay off any debt, save for a down payment if you want to own a home, pay for college, etc.

Our son was born 5 months ago and I just opened a 529 savings account for him. I debated about the best way to save for him (traditional investment accounts, savings account, or roth IRA.) A lot of people don't know that you can save for college in a Roth IRA. Roth IRAs work the same as 529 savings accounts in that you put after-tax dollars in them, and all contributions and earnings are withdrawn tax free in retirement. If you withdraw the money before your retirement age, you pay a 10% penalty and income tax on the earnings (you can withdraw your contributions at any time.) One exception is for higher education expenses -- you can withdraw money for higher education expenses and pay some income tax on the earnings only, and not have to pay the 10% early withdrawal penalty.

You might think that would effectively act as a normal savings account if you withdraw early and pay income tax on the earnings, but roth IRAs have a huge advantage over traditional savings accounts in the long term -- amounts under $1,000,000 are protected from creditors. Traditional savings accounts are prime targets for creditors in a financial crisis such as a bankruptcy. Both roth IRAs and 529 savings accounts are protect from bankruptcy (except for contributions made in the last 1-2 years, so people don't try to stash extra money there and then claim bankruptcy.) My husband and I are in a good financial place right now, but I dealt with cancer years ago and if it ever returns, I don't want to worry about millions in medical bills or a potential financial hardship to wipe out college savings for our child. Roth IRAs and 529 Savings accounts offer a better level of protection for all of the hard work of saving for your child's college.

Now, 529 savings account have another advantage over the Roth IRA, and this is a good one -- when the child goes to complete the FAFSA financial aid application and the parent's income and assets are taken into account, currently they only consider around 5% of the 529 savings account value -- major perk! So they "ignore" the other 95%.

My husband and I do not feel obligated for paying for our child's college in full, we just want to help as much as we can. We plan on purchasing a different house in the next three years and will take out a 15 year mortgage. Our house will be paid off before our children enter college. With no mortgage, we'll have the flexibility to help cash flow college expenses. I opened a 529 account that we contribute $400 monthly to, and we will also deposit money gifts from family members over the years. So we are saving some, but also plan to put ourselves in a place where we can help out more when they're in school.

 

[Upgradable]

Our daughter is now sixteen and we've completed her college savings plan. We started just before she was two. Sounds impossible? Well, we were able to take advanted of College Illinois, a 529 plan with a twist. When we enrolled her in 1995 we were able to freeze the in state college tuition rate for her. In addition to funding the plan, her enrollment guaranteed her eight semesters in an Illinois state university at the 1995 tuition rates. Now, if she decides not to go to an Illinois state university, she just gets the dollar amount of the fund. But this at least allowed us a way to offer her an education.

 

[cara]

Bliss, it really depends on the earning potential of the kid in question and their parents... There are some young people that should not take on the debt of a fancy private college. If for example, they can't get substantial aid/scholarships and are not going into a highly lucrative field. If they are going into a lucrative field, they should still be careful as the debt limits you. Many lawyers/doctors would like to pursue less lucrative paths with their degrees (maybe family practice or public service or something) but with several $100k in debt they feel obligated to take a job/specialize in something that will pay more.

As for parents, many many parents out there should not take on their kids fancy college debt right before retirement. Many people in that age bracket need to devote themselves to paying off their mortgage and saving for retirement now that they have their kids out of the nest, its just the way it is. Sure if you have budgeted well and have an extra $2k a month after making ample retirement savings, great, but many people just aren't in that position.

I say this as someone that went to a fancy school and didn't take on any debt, thanks to family assistance and financial aid. I got a great education; I value the education I got from an expensive private school and am so grateful for my parents and grandparents' financial assistance. I would love to make that happen for my kids but I don't know that I will be able to. We (currently) live in a really expensive area, and while my husband and I both have/had no school debt, we both spent most of our twenties and some of our thirties getting overeducated and not getting well compensated so our retirement savings/house downpayment saving or equity/etc are all behind. And while our anticipated careers are reasonably well-paying, they are not lucrative enough to make me think we will be able to afford to put our kid(s) through the school we were both fortunate enough to attend. We'll try, but I would be hesitant to encourage my kid to take on mountains of debt unless they plan to go into a very well-paying field. Which is sad.

Wow, upgradable, that is great! I think as we get our feet under us with this parenthood thing, we will look more closely at similar state savings plans. Right now we aren't settled in lifetime jobs/location so we'll have to wait a bit or put money in generic plans.

 

[cara]

Bliss, it really depends on the earning potential of the kid in question and their parents... There are some young people that should not take on the debt of a fancy private college. If for example, they can't get substantial aid/scholarships and are not going into a highly lucrative field. If they are going into a lucrative field, they should still be careful as the debt limits you. Many lawyers/doctors would like to pursue less lucrative paths with their degrees (maybe family practice or public service or something) but with several $100k in debt they feel obligated to take a job/specialize in something that will pay more.

As for parents, many many parents out there should not take on their kids fancy college debt right before retirement. Many people in that age bracket need to devote themselves to paying off their mortgage and saving for retirement now that they have their kids out of the nest, its just the way it is. Sure if you have budgeted well and have an extra $2k a month after making ample retirement savings, great, but many people just aren't in that position.

I say this as someone that went to a fancy school and didn't take on any debt, thanks to family assistance and financial aid. I got a great education; I value the education I got from an expensive private school and am so grateful for my parents and grandparents' financial assistance. I would love to make that happen for my kids but I don't know that I will be able to. We (currently) live in a really expensive area, and while my husband and I both have/had no school debt, we both spent most of our twenties and some of our thirties getting overeducated and not getting well compensated so our retirement savings/house downpayment saving or equity/etc are all behind. And while our anticipated careers are reasonably well-paying, they are not lucrative enough to make me think we will be able to afford to put our kid(s) through the school we were both fortunate enough to attend. We'll try, but I would be hesitant to encourage my kid to take on mountains of debt unless they plan to go into a very well-paying field. Which is sad.

 

[Mara]

Ditto what Cara and DD said re: earning potential.

Personally where I am located, the value of an expensive education is not n necessarily a given re: making oodles of $$. I know a goodly number of people who never graduated from college who make 4/5 of what people with MBA's from top schools do or even more depending on what industry the MBA is in. It also depends on your industry and your niche. Just because an education is more expensive does not make it better quality or able to get you a ton of extra money after schooling.

Also--when I was in school and just outside I ran across a lot of people who had things like History degrees and then were working in Finance for the next 15 years. And of course they only got the History degree because Mom and Dad paid for the degree and who knew what they really wanted to do outside of school. But more people I know who paid for their own tended towards Business degrees or those which would bring in the money vs being something cool they'd like to learn about.

I could go on and on about so many people who I know whose parents paid for their schooling and put them up outside of school for a few years while they got on their feet etc etc and compare them to others who worked for everything they got, I know it's not an absolute one way or the other though. In any case, this is why I figure we'll deal with it when it comes to that.

 

[Ninna]

I'm a huge planner... my kids' future was the main reason why there is a gap between the two and I'm still working lol.
Free schooling isn't that great around here and most charter schools run lottery admittance
I don't mind paying tuition for private schooling at all but I would love to get a tax deduction for it
For college, we started a 529 when our first was still in diapers. We opened a CD for W when he turned 2, better option IMHO just in case he decides to be an 'artist' like my niece did
State Grants are nice with a GPA minimum of 3.6 hope they are still around then.
With 3 great universities here, It is possible to swing 11k @ year for most, catch: 4.0 or higher
Seriously, I don't want my kids worry about college money, in our state -MONEY- is the number 1 reason for dropping out of school @39% it's just too high!
We have discreetly saved enough to make it happen, easy to say but not easy to accomplish when your spouse is making a career change. Yeah no room for jewelry/stables but I take a great deal of pride ont that. I'm not worry about their career choices, that's something they have to decide on their own.