Wednesday, July 6, 2016

Six Key points to paying for your kids’ college

College tuition is expensive and paying for it may seem nearly impossible.  Parents can send their kids into the world straddled in debt and possibly stuck in a dead end job due to the need to pay back loans or parents can save for their kid’s college and give them the gift of starting life on their own debt free.  I successfully send four to college without ever taking out a loan and did it on an average income.  I did not work until my youngest kid entered high school, and even then I only worked part time.   I needed 168,000 to send myself and my kids to college.  I received no help from the government; I did not take out any loans.  I saved every single dollar.  How did I do it? 

Start Early
Let compound interest work in your favor.   You will need this compounding to work for you if you want any hope of paying tuition in full.  It is great if you can start when your child is born, but even if you can’t, the earlier you save the better off you are.   If you wait until your child is in high school, you would need to save over $1250 a month to pay for a college costing $15,000 per year. 
I invested in two different ways.  I gave each of my kids a 529 plan, with the youngest one’s plan not well funded.  I didn’t fund the youngest child’s because he had siblings and if they had anything leftover, it was going to be rolled into his account anyway.  I also decided to save money outside of the 529 plans for them in case they needed things a 529 would not cover.   I saved money for my own college expenses outside of a 529 plan, because I was over 30 years old, I had to put my money into a mutual fund. 

Save consistently
Save something from every paycheck.  If you can get an automated investment, you won’t be tempted to not save.  Automated savings is a great thing.  No need to think about it because the money automatically goes into the account.   You can also use unexpected money to fund your kids’ college account.  Get a refund from a doctor or dentist visit?  Pop it right into the 529 plan. 
Give grandma and grandpa the 529 accounts and allow them to help you save for your kids’ college.  My parents could not care less that they had grandkids, so I was not lucky enough to have grandparents that would help, but if you are lucky, take advantage of it and allow the grandparents to help. 

Take advantage of compound interest
Why is that important?  Because $20 a week invested at 5% for 18 years is $30342, but $20 per week invested at 16% is 107,988.  That could be the difference between living at home and going to community college and going to a good public school and living on campus.  Think you can’t make 16%?  According to the average rate of return for the stock market for the 20th century was 10.4% and from 2010 to 2013 the stock market averaged 16.74%.  (I receive no benefit from linking their website, just giving credit to them for their research)

Keep an eye on costs to make sure you are on target
Tuition costs do go up and they tend to go up every year.  The first and second semester my son was in college, his tuition bill was about $7500, but his second year came in at over $8000 per semester and food costs went up as well and his tuition has continued to go up each year.  Luckily we made sure we had a cushion outside of the 529 for just in case tuition increased more than we had anticipated. 
As your income increases, save more money
I went to school and got a two year degree for about $30,000.  I worked full time for a year while getting a bachelor’s degree online for an additional $13,000.  During this time, I set aside my net income for tuition, but after a year, I dropped to working one day a week to supplement three kids going to college. 
Continue to save until the last child graduates
Yes, with three kids who were close in age, we did not have the tuition fully saved by the time the first kid started college and we continued to save as all three take classes.  You will have a better idea of how much more money you need when it is time for your kid to start college.  Be wary of over saving inside of a 529 though.  Money in a 529 has to be used for college tuition and certain college expenses.  Money that is not used before their 30th birthday either needs to be given to another beneficiary that meets the requirements (a family member) or penalties are paid if there is no qualified beneficiary to designate the account to go to.  Once my youngest started college, we send the remaining 529 money to him and when that was gone, we started using money we had saved outside of the 529.  We will not have to worry about leaving money in a 529 plan. 

Let me know how you are doing with saving for your kids college in the comments below.  

Want to read more?  Click my link to see how to feed a family on $70 a week.  70 a week

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