The Looming Fears

Aside from debt, one of the most discussed financial fears among parents is college savings. So many of us endured a challenging experience when it came to paying for education, that those fears and an attempt to prevent the same situation for our children has become a big deal in our adult lives. 

Among the challenges, like being saddled with student loans, putting yourself through school on your own, and being “married” to an employer with the promise of student loan payoff after a number of years of service is this interwoven web of financial lack and unpreparedness.

So here we are as adults now, with sweet little babies looking up at us, determined to remedy the situation and stop the cycle. I’m with you, 100%. There are so many issues with this whole college savings concept though, my husband and I still debate what we should do, if we’re doing the right things, what the best decisions would be to prepare for the most unpredictable future, and what is the best way to accomplish a flexible strategy. 

What You Should Actually be Concerned About

There is, however something more important, that many parents ignore – saving for retirement. If you’re struggling to make ends meet or struggling with paying on debt each month, there’s no way on Earth college savings should be top of mind. What should be? Your own retirement. 

I promise this isn’t selfish. Just the same as after some legit self care or time away, you’re a better mother because you’re in a good mental space to handle the demands of parenting, saving for your own retirement allows you the security to actually be there for your child when they need you. 

As much as you don’t want to saddle your child with student loan debt, the picture looks even more grim when you picture them needing to support you through retirement. You preparing wholly for your future and the retirement lifestyle you expect to live IS a gift to your children.

In fact, if you prepare well enough for your retirement, you may end up so wealthy that you could pay for college outright at that time. But if you don’t, you’re going to find yourself calling your 30 year old child asking them for grocery money. 

There are no retirement loans because that would be a terrible business model – people would have no way to pay the money back before they croaked. But there are student loans, and although they have a terrible rap, your child will have years to repay them. 

With the assumption in mind that you’re fully funding your retirement FIRST, have you stopped to think about all the unknown factors in you and your child’s future?  You might be surprised to find that there may not be as strong of a need for preparation in this area as you think.

Alllllllll the What If’s

First of all, we have no idea what the future landscape of education looks like. There have been so many debates lately in the news and so much turmoil when it comes to tuition prices, the value of that education, and even admissions scams. Will education be state or federally funded? Will our kids need a degree?

What career choices will our kids will make? What careers will even exist? There are so many unknowns out there that we’re just shooting in the dark as parents trying to predict what we need to set up our kids properly. 

Maybe Bachelors degrees will be the standard and our kids will need a Masters Degree in order to land a great job. Maybe Technical schools will make a comeback. Honestly, we can hypothesize and guess and even call out research on every side of the debate, but we’d be here all day and only time will tell. 

The thought has definitely crossed my mind that maybe one or both of my kids may not attend college. There are fantastic, seemingly sustainable, careers that don’t require a degree. Think about the electrical field, HVAC, or plumbing. All of these are labor intensive specialty fields that are highly necessary to our lifestyle and make great money, but do not require a formal education.

Or what about this? There are future, highly valuable, professions that don’t even exist yet. How can we plan for the unpredictable? 

I don’t intend to create chaos or confusion when presenting all of these variables. I pose these questions because it’s important to thoroughly realize what you’re facing. If saving for college is what keeps you up at night, thinking through these variables may ease the tension a bit by showing you that you’re trying to book a plane ticket with no destination. 

If you’re fully funding your retirement savings, meaning you’re contributing upwards of 15% of your income and maxing out 1-2 types of retirement accounts, I give you permission to worry about saving for college. With that said, let’s dive into some options you can explore, but only if you’re in this boat. 

When it Comes to College Savings, What Are My Options?

There are several types of accounts and several options for college savings. Here are the top 3 in my book: 

The ESA, abbreviated for Coverdell Educational Savings Accounts, is a savings account with investment options built in. There are income cap rules and the maximum you can contribute in a year is low – only $2,000. 

This type of savings is much like the Roth IRA in that you contribute after-tax money, and the growth is tax-free when used for “qualified educational expenses”, which has a very broad definition. Benefits must be used by 30 years of age (I hope your child is long-graduated by then!) and any unused funds can be changed to another beneficiary (think younger siblings or grandkids). 

You can choose to invest the money in your ESA account in any stocks, bonds, mutual funds, exchange traded funds, etc. that may be available through the host institution. You can open an ESA at most financial institutions, but Ally, Fidelity, and even your own bank or credit union might be great options as mentioned here.

For example, ours is through E-Trade and I’ve chosen several mutual funds (how to pick investments coming in the next post!) in which to invest the money. This way I feel confident that the portfolio is diversified in the stock market (no single stocks!) and will earn some interest toward my kiddos’ education.

Another awesome tax-advantaged college savings option is a 529 state savings plan. As with the retirement plans discussed here last week, the name simply resembles the tax code that describes this tax deferred tool. 

A 529 plan’s contributions are after-tax dollars, and qualified distributions are tax-free. These plans are per state, but you’re not limited to where you live or even where the kids will get their degree. You can choose the state plan that you prefer, although that requires you to research what each state offers.

The contribution limit on this type of college savings account is quite high at $14,000. This is particularly great for high income families, not only because of the high contribution limit, but also because there are no income caps for contributors. Dive into everything you need to know about 529s here.

If you are a high-income family, you won’t qualify for financial aid anyway, so here’s how you’d pay for college. 529s also have no income phase-outs and no age limit on distributions. 

For all these reasons combined, a 529  is perfect  for upper education like graduate school, medical school, and law school, among other higher profession designations. If you’re a family earning in excess of $200K per year and you truly believe your kiddo will pursue education beyond the undergrad, I suggest looking into 529. Oh, and just incase you’re wondering, here are some by-age guidelines.

There is one way to prepare for retirement AND your child’s education at the same time, however – by saving into a Roth IRA. This comes with the risk, of course, that you’d drain the account to pay for your kiddo’s education and not leave enough for your own retirement. But managed and calculated properly, this could be the golden ticket- take some time comparing 529s and the Roth.

Regular Savings Accounts for College Funds are a No – No

These days, just stashing your cash in a standard savings account is likely doing more harm than good. The interest you earn is negative when compared to the inflation rate. Bonds and CDs have fallen out of favor as well since the rates have been at record lows the past 10 years or so.

I’ve met a few people who have an undescribable hesitation when it comes to investing – they feel like by moving money to an investment account from their savings is equivalent to losing the money. There’s fear of it being locked away, inaccessible, or lost.

I have news though, by keeping excess cash in savings (beyond the emergency fund level), you’re losing money for your family. Not only are you earning effectively negative interest, but you’re also missing out on any and all potential market gains and compounding interest.

Take A Step Back – Start by Strategizing First

With all of these options swirling, it’s easy to get overwhelmed or confused. Go back to what we discussed before though. If you’re contributing anything less than 15% of your income to retirement, college savings is none of your concern…yet. Work that debt down and that contribution percentage to retirement up and circle back to this when you get there.

In the mean time, I’ll share some of our personal details with you and what we decided when it comes to college. It took us years to accomplish this, but I’m proud to say that we’re contributing 15% toward retirement – this includes both of us maxing out our Roth IRAs and my contribution to my 401K at work. So, we knew it was time to tackle the kids’ future.

Since we’re waaaaay below the maximum income limit for the ESA, we decided to start there. $2,000 per year per kiddo seemed very do-able. If and when our income approaches the top-end, we will explore the 529 options and go that route. In the mean time, I’m really happy knowing the money we’re contributing to our Roth IRAs can be used for educational expenses as well.

Aside from all of those unknown factors like how much college will even cost 15 years from now, I’m pretty comfortable that we’ve taken the right steps in the right order and are at least doing something in preparation for the future.

Get Going

As discussed in my prior post, indecision gets you nowhere. So don’t waste time himming and hawing about which account to open for a long period of time. If you have your emergency fund, you are debt free, and you’re contributing to retirement, THEN and only then should you pick one of these options and start funding it. 

If you’ve done your research and have decided to open a 529, College Backer does make it quite simple.

The universe rewards action, not intention, not “but I was thinking…”, and not well I meant to’s.

Just the same as with any type of savings, the sooner you can contribute, the better.  Oh, and if you got this far, I’m assuming you are debt free and well on your way to a happy retirement – So, all I have to say is WOW, keep it up!