Saturday, April 10, 2010

Why Its Fiscally Irresponsible To Save For Your Kids' College

Not only do I have no idea what I'm doing most of the time when it comes to parenting I'm also pretty clueless about finances. Mostly I'm just trying to squeak by, saving when I can (which isn't often these days), looking for sales, and generally doing the best I can to be fiscally responsible. Usually I'm ok with that. And then there are the days when cold, hard panic runs down my spine and the dark spidery words "college fund" pass before my eyes. I decided to do a bit of research on this topic because the unknown is always scarier than the truth, right? Right!??!?!

  • So, first off, what should I be saving for first? 'Cause to be honest, I've got a ways to go: house savings, retirement savings, emergency funds...

According to this chick at U.S. News and World Report its ok that I'm putting my daughter's college fund on the back burner. I really liked this article because it made me feel smart instead of selfish and disorganized. The main point she makes is that you can get a loan for college, but you can't get one for retirement. And this lady even told me that I should buy a house before I put money in a college fund because I can always use a home equity loan to help with college expenses.

The friendly interweb also informed me that I should be putting at least 15% of my income into retirement before I consider starting a college fund for my kid. That's really good to know, because honestly, I'm not putting nearly that much away for retirement. My plan was that once we could cut down on our child care expenses I would start putting that into a college fund, but now I'm rethinking that. Sorry darling daughter. So, to sum up my priorities will be:
  1. Save for an emergency
  2. Save for a house, while putting enough in my retirement fund to get the employer match
  3. Retirement
  4. College savings
  • How much should I save for college?
Most of the articles I read seemed to say that I should save as much as possible as early as possible. However, I need something a little more solid than that. One calculator I used said that if I don't start saving until my kid is 5 years old that I will need to save about $400 a month per child if I want to be able to pay for 50% of their college. This assumes that we will take out loans and/or pay at the time for the other 50%. That actually seems pretty reasonable to me, especially given the fact that imagining my child as being 5 years old and that I have $400 a month to save seems like a totally abstract fantasy to me right now. In fact, since we're talking about something 4 years in the future, and for all we know the world will be destroyed in some massive earthquake (have you noticed how many large earthquakes there have been lately??) I'm going to say that I'll plan to save $600/month.
  • When do I need to start saving?
Well, again, most of the articles said as soon as possible and went on and on about how I won't have to save as much per month of I start right when the kid pops out. Well, too late for that.
  • What kinds of accounts should I use to save in?
It looks like the main choices are stocks and bonds or one of those tax differed 529 accounts. There are some other options like Coverdell Education Savings accounts (can't save more than $2000 a year), as well as UGMA and UTNA accounts which are custodial accounts. The custodial accounts make me nervous because 1) Once you put the money in you can never get it back if your kid decides to go join a cult or something, and 2) the money becomes your kid's to do with as he/she pleases at age 21, even if they want to give it to a cult or something.

From what I read you want to invest your stocks and bonds in a way that will allow you to start off with more risk, but higher earning options and then get less risky/lower earning as your kid gets closer to college.

Virginia has a number of different 529 options. I'm sure other states have similar options. The one I like the most is VEST.
  • It seems like the best of both worlds because you can get the tax benefits (tax deductions, tax free interest), and you can also invest in a stock portfolio that fits your kid's age.
  • Your kid can use it at pretty much any accredited college or university in the country.
  • You can put up to $350,00 in the account
  • If they decide not to go to college or get a full scholarship you can:
-Have up to 10 years to use the $$ for school(for grad school, etc)
-Transfer the money to someone else in the family
-Take the money out and cancel the account (but you'll be charged a 10% tax penalty)

The only thing that kind of sucks is that you can't pay for off campus room and board for your kid with that money.

So after doing the research here's my plan:
  1. Buy a house (leaving enough $ leftover for an emergency savings account)
  2. Increase my retirement savings as we decrease child care costs until we're saving 15% of our income.
  3. Start saving about $600/month in Virginia's VEST 529 fund for college. At some point possibly put some of the money in a separate account to help fund the off campus high life.
  4. Get really drunk and not think about money.
You know, that actually does seem a lot less scary now. There's nothing like a good list, and knowing that I don't have to deal with this for another 4 years, to make me feel better.

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