How Will Your Children Pay For College?

Little LRC walking to preschool last winter

Little LRC walking to preschool last winter


Paying for a child to go to college or at least helping to pay a substantial portion of the tuition is the goal of many parents. While I’ve mentioned that some of my co-workers seem to go to far in financially supporting their adult children rather than teaching them to be independent and financially literate, I understand wanting to help pay for college. They want to give their kids the best chance for a financially successful future and don’t want them to start out life with the burden of substantial student loan debt.

A recent survey has revealed that millennials are saving more for their children’s college education than parents from previous generations. The results of the survey makes sense because millennials are the generation that has had to bear the brunt of the student loan debt crisis. They have first hand knowledge of the burden of having student loans weighing them down and don’t want their kids to have to carry that burden.

Should you pay for college?

If you’ve got nothing saved for retirement or you’re living paycheck to paycheck, it’s probably best to focus on fixing that before saving for college. While your child can always borrow to pay for college costs, you won’t be able to borrow money to fund your retirement. There are also parents who don’t think it’s a good idea to pay for college because the child will have a sense of entitlement or take their schooling for granted. I think that paying for college is a shared responsibility. I have two little boys, a 3 year old and a 3 month old. I will do my best to help them pay for college but I’ll expect them to chip in as well.

How much should you save?

With private universities charging over $50,000 and even over $60,000 in tuition, it seems impossible to save enough to pay for college. And at the rate that tuition is increasing, it seems even more impossible. However, personally, I think the rate at which tuition is increasing is unsustainable. When college grads with heavy student debt burdens have difficulty finding high paying jobs and have a difficult time making their student loan payments, the college tuition bubble is bound to burst. In any event, both my wife and I went to state universities, and while tuition is increasing at public schools as well, they are still much more affordable. Many parents and students love the big name colleges because they think that is the only way to be successful, but often times, where you go to school will not determine what you will achieve. If my child turns out to be high-achieving and we can afford the price tag, I won’t deny him that opportunity, but going to a big name university no matter the cost just doesn’t make financial sense.

529 NYS saves

How do you save for college?

The 529 plan is probably the best vehicle to save for you child’s college education. Surprisingly, many people haven’t heard of the 529 plan. Only about two-thirds of Americans have heard of the 529 plan and only about 27% of families use it to save for college. Many people also have misconceptions as to how the 529 plan works. When you contribute money to a 529 plan, the money grows tax-deferred and when you withdraw the money to pay for qualified college expenses, you are exempt from federal taxes. Many states offer a tax deduction for contributions into your state’s plan. I live in New York and participate in its 529 plan because of the tax deduction and because it contains low-cost Vanguard funds.

Some have said they don’t want to save in a 529 plan because their child may not go to college. The 529 plan can be transferred to another child or to a grandchild or even to yourself. So there is some flexibility. However, if you really don’t like being tied down, you can always save in a taxable stock account.

Saving tips

Start early – I start saving for my first son’s college when I found out that my wife was pregnant. What can I say? I’m a planner. Since I didn’t have his social security number, I listed the beneficiary of the plan as me and then changed it to my son after he was born. Getting a head start opening a 529 plan will give allow your contributions to compound. Determining how aggressive you want to invest college savings will depend on your risk tolerance. If you are having trouble saving for your child’s college because you’re still paying off your own student loans, check out this valuable resource about student loan refinancing.

Have family friends contribute – When my friend’s daughter turned one, he threw a birthday party and asked for contributions to his daughter’s college savings plan instead of toys. His daughter has been showered with plenty of toys from family and friends already and they have a small apartment. A gift towards her future college education would be much more valuable. The 529 plan in New York makes it pretty easy for people to contribute online.

Have kids contribute – As I mentioned early, I think it’s important that children share in the responsibility in saving for their college education. When I was growing up, I would receive cash gifts during my birthday and holidays and would also receive an allowance. My parents would ask me occasionally if I’d like to save and invest that money for college. (The 529 plan did not exist at the time). As a good little saver even as a child, I would allot some of my savings for this purpose.

Do you plan on helping your child pay for college? How are you saving for it?

18 thoughts on “How Will Your Children Pay For College?

  1. Biglaw Investor

    That’s good to know that the NY 529 plan makes it easy for others to contribute. We don’t have any kids yet, but I’ve always thought it would be a good idea to open a 529 plan at birth and then allow friends and family to chip in along the way. A bonus for them is they can write off the gift from their state taxes if they’re a NY resident (if they’re not, I suppose it makes more sense for them to gift the money to you and then for you to make the contribution).
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  2. Done by Forty

    We do plan on providing some assistance to our kids with college (probably in the range of $50k or $100k per kid, in today’s dollars). But I’m not particularly keen on the 529 plan. You get no federal income tax deferral on the contributions, and if you manage to pick tax efficient investments the tax-free growth is somewhat muted, as well.

    All in all, I personally don’t see enough benefit to lock a fairly significant amount funds into being spent on education.

    I know everyone thinks their kids will go to college but the stats don’t like: only about a third of Americans even have a bachelor’s degree now. I’m not exactly sure if FI will make our kids more or less likely to go to school. When they see me not working all day, hanging out with them on bike rides and playing board games and helping with their homework, does that dull the motivation to seek out a degree? We’ll see.
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    1. livingrichcheaply@gmail.com Post author

      I’m only saving a small amount so I’m fine with locking it up in the 529 plan…plus I do get the state deduction. I think the stats are a little misleading. While only a third of Americans hold a bachelors degree, I think if you survey children of parents who went to college, that number would be a lot higher.

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  3. Laurie @thefrugalfarmer

    Love the idea about asking for college tuition contributions instead of toys for birthday gifts. We will contribute to our kids’ college tuition; we’re just not sure how much yet. We’re also encouraging them to use the many, many tips out there for cutting college costs and to graduate as close to debt free as possible. I hope they listen!

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  4. Amanda @ centsiblyrich

    Like Laurie said, asking for college savings contributions in lieu of gifts when the kids are little is a great idea…wish I had thought of it when my kids were little. We have 529 plans for both of them and contribute a small amount each month. The kids put in half of their birthday money as well. We won’t have nearly enough to pay for four years, but it will help.

    Our son is actually considering enlisting in the Air Force to help cover college costs. This isn’t for everyone, but he thinks it will work out for him.
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    1. livingrichcheaply@gmail.com Post author

      I know, kids have plenty of toys as it is. And our apartment is running out of space! =) It’s great that your kids contribute their birthday money. I’m not sure I will have enough to pay for four years, and I’m okay with that. That’s great that your son is considering the Air Force. If you don’t need the 529 plan for him, you can transfer that amount to your other child. Also, if he attends a military academy, you can withdraw the money without penalty. http://www.savingforcollege.com/blog/when-your-child-wants-to-attend-a-US-military-academy-640

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  5. Mustard Seed Money

    Awesome ideas and I especially like the idea of starting the account when you found out your wife was preggo. We’re putting $4k a year towards my son’s future college expenses. The state of VA allows us the ability to deduct up to $4k a year from our state tax return. So we figured we’d max it out. Hopefully over the next 18 years he’ll have enough to go to the school of his choosing.
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    1. livingrichcheaply@gmail.com Post author

      Yea, I wanted to get a head start! We’re not maxing out the 529 plan and only contributing $100 a month plus some gift money.

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    1. livingrichcheaply@gmail.com Post author

      Yea, I agree with you about them learning financial lessons as well as having some skin in the game.

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    1. livingrichcheaply@gmail.com Post author

      Yea, I think it’s great to give them time to focus on their studies, especially if they have an intense major. However, working a few hours on campus is also valuable is not likely to hurt their studies.

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  6. Derek @ Moneyahoy

    We are NOT planning to pay for our kids college. We are expecting them to do well in school and get a scholarship. This is a complete 180 from where we were just a couple of years ago. After reading the book The Millionaire Next Door, I came to realize that paying for their college would make them “soft” and probably worse students over the years. Having the knowledge that your college will be paid for would generally make one not try as hard in school IMHO. I think we are doing our kids a favor, but it’s a pretty big contrast to what most folks commenting here are thinking…

    As an aside, I don’t even think colleges will exist as we know them today in 10 years. With the internet and online learning, there really is no way to continue to justify $100K tuitions any more. I earned a mechanical engineering degree about 15 years back that I believe could be almost entirely online with today’s technology.
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    1. livingrichcheaply@gmail.com Post author

      That’s good to have high expectations. I don’t plan on paying fully for college but I think it’s good to help them out. I think if a parent does a good job raising their child for 18 years…paying for college won’t make them “soft.” Also, while I do agree that they should have some skin in the game, I think it’s unrealistic to expect to pay the entire cost of college. And yes, I also agree that college will look vastly different in the future.

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    2. PhilanthroCapitalist

      Derek, I’m going to call you out on something: The idea that paying for your children’s tuition will make them “soft” is ridiculous, and it isn’t supported by anything you read in The Millionaire Next Door. The ONLY evidence you have that you *might* be able to make an argument with is on pg. 14, listing facts on “America’s millionaires”:

      “Nearly half never received any college tuition from their parents or other relatives.”

      Take into account that this book was written in 1996, meaning the earliest data on the rate of college tuition was probably taken from 1990-91 or earlier (I’m willing to bet that very few of the millionaires they surveyed managed to build substantial net worths in less than five years upon graduation; so any time before the ’80s is probably more accurate). According to the CollegeBoard, public four-year in-state college tuition in 1990-91 cost $1,908/year; in 1980-81, $804/year; and in 1971-72, $428/year.

      For 2016-17, it’s now up to $9,648/year. To keep it simple (and to make a VERY conservative estimate, considering tuition will probably keep rising another 2.5-3%/year), let’s go with the data from 1980-81 and say that most American millionaires spent less than one-tenth on college tuition that your children are going to have to spend.

      I’m going to combine those two points for emphasis: Even though America’s millionaires spent less than one-tenth of what your children are going to have to spend, around 50% of them STILL received help from their parents.

      Source: https://trends.collegeboard.org/college-pricing/figures-tables/tuition-fees-room-and-board-over-time#Key Points

      From page 164: “The affluent have a great appreciation for the value of a high-quality education. We asked millionaires if they agreed with the following statement:

      – School/college learning is/was of little use to me in the real world of making a living.

      Only 14 percent agreed; 6 percent had no opinion; and the balance, 80 percent, disagreed. That’s why millionaires spend a large amount of their resources on their children’s educations.”

      I’m not going to tell you how to live your life, but I know you’re betting on timing the market (“no way to continue to justify $100k tuitions any more”), and I can tell you — and the past 30 years of rising tuition costs can, too — that’s a risk you’ll probably regret.

      At least make it a more calculated risk by understanding what Dr. Stanley and Dr. Danko found.

      Read my recent post at thephilanthrocapitalist.com called, “How My University Fucked Me.”

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