Posted on October 31, 2008
One of the biggest financial decisions parents will face is whether or not to pay for a child’s college education. I’ve discussed this matter with numerous people and their feelings run the gambit from paying for everything to paying for nothing. Some take the position that they had to work, take out student loans and struggle to get a college education and they want their children to do the same. They feel the struggles they faced made them tougher and prepared them for the pressures of the real world they faced after school.Others viewed giving their children a good education and enabling them to enter adulthood with the ability to earn a respectable living and not be saddled with debt as part of their responsibility as parents. I have encountered strong feelings both ways. Personally, I chose the latter and I am very pleased with the results. On the other hand, I know people who chose not to help their children beyond high school and whose children have been very successful as well.
What concerns me is the people who would liked to have helped their children get a college education, but couldn’t? These are the parents who kept putting off saving until “next year,” but “next year” never came. Kids grow up fast. College is expensive. If you plan to help your children with their education, the time to start saving is now. Now means as soon as they are born.
Most students enter college at age 18 or 19. They take 4 years or more to earn a degree. That means if you start as soon as they are born, you will have 22-23 years to save before having to make that final tuition payment. With that much time for your savings to earn and grow, the amount you would need to save each month is small.
Many years ago, I heard an insurance salesman use the best example of why starting early is so important. I’ve followed his advice in many areas of my life; saving for my children’s college education being just one of them. Here’s how he explained it. If you start saving when a child is first born, the amount you need to put aside is small enough it would be like carrying a marble around in your pocket. In a short time, you would hardly notice it was there. If you wait until the child starts school, then the amount you would need to save becomes more like carrying a baseball around in your pocket. You could do it, but you’d know it was there every day. However, if you wait until the child enters high school; the amount you would need to save would be like carrying a bowling ball around. It wouldn’t fit in your pocket and even if you could carry it around, it would be an extremely difficult task.
In today’s society, people want everything to be easy, but they aren’t willing to make the small sacrifices it takes to make them easy. Today, parents who want to help their children with college expenses have more options than ever in history. In addition to traditional options like savings accounts, annuities, and U. S. Savings Bonds, there are Section 529 college savings programs and Coverdell education savings accounts. There are plenty of ways to save for college, but none of them work unless people think long term instead of just what’s facing them today. Choices have to be made. Choices like, do I dine out an extra time this week or use that money to educate my children?
A college education is an investment. The question is, how do you finance that investment? As the greasy mechanic in the old Fram oil filter commercial used to say, “You can pay me now…or pay me later.” The implication was you’re going to pay, one way or another. That’s the dilemma facing many parents who wait until they are left with only three options; pay as you go, finance it and pay later, or find scholarships to help. If they had only realized how much more freedom and choices they would have if they had started saving early and not waited until their children were ready to enter college.
Statistics show that over the course of a lifetime, the additional earnings from a college education can easily exceed $1,000,000. That’s not a bad return on a $50,000 to $200,000 investment, depending on whether your child attends a public or private institution. One of the most popular ways to fund this investment is with a Qualified Tuition Program or 529 Plan. These plans allow earnings to grow tax free and the distributions are tax-free when used for qualified post-secondary education. The problem is, there are no guarantees that funds invested in stocks and bonds will go up in value and as we’ve seen recently, they can go down substantially in a short period of time.
Here’s a tip! If you want a safe and secure way to save for your children’s education, for most people Series EE and I bonds purchased after 1989 offer the same tax advantages as the 529 plans without placing the principal at risk. There are some income limitations for the tax exclusion, but you don’t have to worry about the principal being reduced by a stock market crash. No matter which savings plan you use, the important thing to remember is that the earlier you start and the longer you keep it up, the more ability you will have to assist your children with their education.
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