Recently, Mr. Steward and I finally started saving monthly for our two daughters’ college educations. Historically, I put cash we received from the baby shower and subsequent birthday money into an account for Bean, but we didn’t have enough overflow each month to consistently earmark college money until now. The change is almost entirely a result of raises, although some decreased spending has helped, too.
This is a major milestone for me. It makes me happy to know that my second income is used primarily to fund our girls’ futures. It feels great to look at the photo of them on my work desk each day and think, “This is why I am here.”
Why We Are Saving
Saving for college is, believe it or not, not without some controversy in the personal finance world. Many FIRE (Financial Independence, Retire Early) bloggers choose to instead put the dollars that might go to their children’s college educations towards their financial independence goal. The beliefs generally seem to be that staying home with the children (funded by FI dollars) is preferable, and that college isn’t always necessary for a high-earning career.
The first is a non-issue for us. The FI math puts us becoming financially independent just after our children leave for college. If we want to be able to contribute to their education, we don’t have time to FIRE first. We’re simply on a different timeline.
I agree that college isn’t necessary for my children to earn the money they will need to support themselves. There are a variety of trades and entrepreneurial paths that could easily have my girls earning far more than either Mr. Steward or me. But, there are also a lot of jobs that do need a Bachelor’s degree. As much as we love the stories that show anyone can rise above their educational and career barriers to achieve success, statistically a Bachelor’s degree holder earns $300,000 more over the course of their lifetime than someone with a high school diploma. I want to maximize the doors that are open for my children, which means making a Bachelor’s an option.
Beyond the numbers, I genuinely believe education matters. The things I learned at college while I was transitioning into adulthood transformed my horizons. I’ve written before about how I believe the Humanities and a broad knowledge of the liberal arts help us, simply put, be better people. College is not the only place those skills can be learned, but it remains a practical, straightforward one.
I also have some personal pride involved on the savings front. I was, and remain, the first person in my family to earn a Bachelor’s degree. My parents didn’t have a lot of money as I grew up, and most of my college savings came from writing awards I won. Thankfully, I was taught about the FAFSA in outreach programs and had killer grades, because the only financial advice I got from my parents about college was to “make sure I could afford it.” The unspoken addendum was, “Because we won’t be able to help you.” I felt resentment about that for a long time. I thought that if they had simply managed their money better, maybe there would not have been a need for me to take out student loans. Moreover, I think I was scared to need to figure it out on my own.
Now I realize my parents did the best they could–they made the same money “mistakes” as anyone, they just made a bigger difference because there was less money to go around in the first place. I know my parents would have helped if they could, and probably felt worry and embarrassment that they could not do so. I don’t want to be in the same position when it is time for my own children to launch. I want to be there, able to help to the degree that seems right.
How We’re Saving
Beyond the debate of whether or not to save for college, how to save is equally contentious. There are essentially two tax-advantaged investment vehicles for educational expenses: a 529 or a Roth IRA.
Investors in a 529 put in after-tax dollars. After that, as long as funds are used for qualifying educational expenses, the growth is tax-free. Many states offer state tax benefits to residents in that state’s 529 plan. Indiana, where we live, offers a 20% tax credit on up to $5,000 of investments (or a maximum $1000 credit). Previously, 529 funds were limited to higher education expenses, but the recent Tax Cuts and Jobs Act means that the funds can also be used towards elementary and high school education tuition.
The downside of the 529 is that if funds are not used on educational expenses, there is a 10% federal tax penalty (and possibly more for the state) on the growth upon withdrawal, on top of the normal tax rate. If a child receives a scholarship, the amount of the scholarship can be withdrawn from the 529 without penalty, however. Unused 529 funds can also be transferred to other family members. There is an income and annual contribution limit, but it is so high that we have no cause to be concerned with it. The investment options are also usually limited to a select few chosen by that state.
A Roth IRA is also funded with after-tax dollars. But wait, isn’t a Roth IRA for retirement? Well yes, which is why many prefer the flexibility of a Roth. A Roth IRA fund opened for a child can be used for retirement, a down payment on a house, or education expenses without incurring a penalty. The trade-off is that taxes are paid on any investment growth that is withdrawn. There are also annual contribution limits (currently $5,500 per year), an income phaseout, and the child has to have an earned income equal to or higher than the contribution. The investment options are basically limitless for a Roth IRA, though.
In our case, we decided to take the straightforward path and have 529 accounts for each of our girls. The state tax credit is too enticing. We also aren’t too concerned about what happens if we save money the girls end up not needing. “Oh no, we saved too much!” is hardly a problem, and we can always transfer the funds either between the girls or to our grandchildren. Moreover, as I’ve already said, education matters to us. We will encourage continuing education, so we hope that means the funds will get used.
How Much We’re Saving
Once we decided we would invest in a 529, we had to figure out how much to contribute. Although we wanted to be sure our girls could receive an education, we don’t believe we owe them a luxury education. While I went to a private liberal arts school for college, I had enough aid and scholarships to make it work. I also attended a community college in high school for some early coursework, and Mr. Steward earned his Associate’s from a community college. We think community colleges are just great, and if they want something above and beyond the local community college followed by an in-state public school, that will be our children’s responsibility to provide for themselves with scholarships and/or work.
Mr. Steward and I set our price point at covering the average parental contribution and loan costs for two years of community college, followed by two years at an in-state university. (We also live in a college town, so in the worst case, the girls can live with us while they pursue their degree and skip room and board charges.) We plugged those goals into a variety of college savings calculators, which account for inflation, average investment earnings, and the rising cost of higher education. (This is my favorite such calculator.) The number hovered around $250 per month, per child, so that is what we started saving.
As far as the investments go, the Indiana 529 has some low-cost index funds in its plan. Nonetheless, while I feel very comfortable personally managing my asset allocation in my retirement accounts, I felt unsure about how to manage the allocation for the shortened timeline of college savings. For that reason, the funds are currently invested in target date funds for each girl. They cost. .2% more than the index fund options, but I am okay paying that until (if?) I gain enough confidence to manage them myself.
And that is the entirety of our college savings plan! We’ll reevaluate in 5 years or so, taking into account new data on college costs, particularly watching for lower-cost options like Western Governors University. We can always recalibrate if it seems like more or less funds will be needed. In the meantime, we feel good to finally be able to save enough that we should be able to tackle the behemoth that is higher education when it awakens.
Are you saving for college? How are you saving, and how much?