It will take more than pennies to send your kids to college
As a new father I feel a certain pressure to provide. I felt that pressure before when I married, but this feels a bit more grown up, a higher sense of responsibility. I know we can keep him fed and fresh diapers, but I’m talking about college. College has been growing at higher college inflation rate than the general inflation rate.
On average it is about 7% and the general inflation rate is 4%. The point is that you’d have to earn a higher rate on your investments than the inflation rate. Putting your money in the bank just won’t work because your money won’t grow as fast as college will get expensive. Take the case of the University of California system recently with their 32% increase in tuition.
I really want my son to go to college or at least have some money for learning if college doesn’t exists. I will just assume our son (the genius that he is) will go to some form of higher education. We have several options.
1) Let him pay for it all (loans +scholarships+ work)
2) Let him pay for some of it and us some of it (Scholarship + Parents checkbook+still work)
3) Let us pay for it all of it and he can pay for his other expenses. (Parents check book+he still works)
4) ***Read My updated plan***
Perhaps our son will win some scholarships, but I really like plan #3. I’d like him to work to grow his character and I really don’t like debt. So, it’s time to start saving and investing, but how? ESA, 529, Prepaid college, UTMA…etc. So many options and so many people willing to sell us their ideas.
We started with an Education Savings Account (ESA) Why? Well, because the earnings grows tax free and has to be used for college (or you will draw penalties) The only drawback is the $2,000 a year contribution limit till 2012 when it will drop to $500 a year, unless certain laws are extended. After we top off our ESA a 529 would be our next choice, but only one that lets us determine the investments. I want a low cost 529 that I can research and choose the mutual funds inside.
That is about it. Very vanilla, but powerful. Let’s do some math. So for with $2K down and around $200-300 a month invested in good mutual funds, he should be able to go to college with a little extra for books. That assume a 4%-7% inflation rate an at least an 8% average growth on investments
How do you plan for paying for your children’s college?
(Photo by alancleaver_2000)
| Scenario 1 | Scenario 2 | |||
| Cost of College (4 Years) |
$40,000 | $40,000 | ||
| 0 | 0 | |||
| 0 | 0 | |||
| Years of Savings |
18 | 18 | ||
| 18 | 18 | |||
| 18 | 18 | |||
| Rate of Return |
8.0% | 10.0% | ||
| Inflation Rate |
7.0% | 7.0% | ||
| Mutual Funds -Taxable Accounts | $- | $- | ||
| College Saving 1-ESA’s | $2,000 | $2,000 | ||
| College Saving 2-, 529′s | $- | $- | ||
| College Saving 3-ESA’s, 529′s | $- | $- | ||
| College Saving 4-ESA’s, 529′s | $- | $- | ||
| Total Current Bal. of Retirement Plans | $2,000 | $2,000 | ||
| Mutual Funds-Taxable Accounts | $- | $- | ||
| College Saving 1-ESA’s, | $166 | $166 | ||
| College Saving 2-, 529′s | $100 | $50 | ||
| College Saving 3-ESA’s, 529′s | $- | $- | ||
| College Saving 4-ESA’s, 529′s | $- | |||
| Total Monthly Investing | $266 | $216 | ||
| Taxable Accts -Balance (from Current Balance.) | $0.00 | $0.00 | ||
| Nontaxable Accts -Balance (from Current Balance.) | $8,401.15 | $12,009.39 | ||
| Taxable Accts -Balance (from Monthly Contr.) | $0.00 | $0.00 | ||
| Nontaxable Accts -Balance (from Monthly Contr.) | $127,702.91 | $129,721.65 | ||
| Total Balance at College Age | $136,104.06 | $141,731.04 | ||
| College Exp. With Inflation | $135,197.29 | $135,197.29 | ||
| Excess/(Deficit) | $906.77 | $6,533.75 | ||
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