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Saving for College
Friday, December 22, 2006
One of the undeniable goals of parenting is to provide for a child's education. As most of the readers of this blog know, in my retirement I'm teaching a class or two at a local college. And every semester I always throw out some key facts about the importance of education to my students. The median income per person in the U.S. by level of education is:

High School grad $23,600
Bachelor's degree $47,500
Advanced degrees $61,600

As you can see a Bachelor's degree alone can mean over $20,000 a year in income. Today the average cost of a Bachelor's degree at a public institution is about $40,000 (that includes everything, tuition, room & board, the works) or about $10,000 a year. So although it's expensive, the payback is pretty darn good.

How much will college cost in the future?

Of course for parents of little ones who may not be attending college until 2020 or beyond the costs of college will much higher than today. Unfortunately education costs are rising higher than the overall inflation rate (currently the average increase is about 6-7%). That means in 2020 the costs for four years at the average public college could be over $100,000. Ouch.

Here's a great college cost calculator to help you figure out how much your little one(s) will need when they enter their college years.

Now before you collapse in tears thinking you'll never be able to save that much money and that your child will be destined for a life as a bathroom attendant, relax and take a deep breath. There are some very good savings programs that will help you get there. And remember there are also many supplements that may be used (including scholarships, student financial aid, and student loan programs). But let's take a look at the best thing to come along in years for helping you to save for your little one's future.

The 529 Plans

Years ago there was something called an Education IRA (which still exists) but that is now superseded by a much better vehicle to save for a child's education known as a 529 Plan. Think of them as tax free savings accounts. Basically you put money into the plan which is invested (in stocks, bonds, etc.) and then grows tax free. You don't pay any taxes on the income as it grows nor when you take out the money. Let me say that again, all of the money in the account is tax free. God, I love those words.

There are a few limitations in that the money must be used for education expenses (but that includes money for books, tuition, room & board, even computers). Also there are some maximum growth amounts but those aren't very important (currently it's something like your account has to be under $300,000, but even Stanford isn't going to cost that much!).

Other benefits of the plans include that anyone can contribute. So you can set up an account and have grandpa and grandma, aunts and uncles, basically anybody add to it over the years. Plus you don't have to put in a bunch of money to start one. Most plans allow you to start an account with as little as $25. And there is no income limit to start one, so even wealthy folks can do it.

I believe that all 50 states currently have plans and there are a few differences between each state's plan. But you don't have to use your home state's plan if you don't want to (however in most cases there are some additional benefits if you do).

So what will I need to save?

Let's do a simple example with the same data we've been using. We'll use a fairly conservative 8% growth rate (personally I think 10% is more realistic) and say that the four year costs will be $100,000 in 2020 (but keep in mind you will only need 1/4 of that in 2020 and another 1/4 for each year the kid is in school).

So to reach that goal you will need to put about $220 each month into the plan. But remember there are many other sources the child may (and probably will) be able to use (financial aid, loans, scholarships). And as said others can contribute (tell grandpa and grandma to put money towards their education instead of buying a new toy they may only play with for a month or two).

So it's very likely you personally will only need to contribute 50-80% (or even less). And that can lower the average monthly contribution to around $100. And you don't necessarily need to start out with that much. You could start with a smaller amount now and as your own wealth grows (salary increases from work, etc.) contribute more and more as time goes by.

Where to find more info

Most plans are managed by financial institutions and not the state government (thank God for that). In California, Fidelity Investments runs it and their site has a lot of valuable information about 529 plans in general.

The SEC has some details about 529 plans as well but is more of a read for those who are a bit more financial savvy.

This site does a nice job of going over the basics most of which I've covered in this post.

Having accomplished my personal goal of retiring before my 40th birthday I can tell you from experience that the old adage is all too true:

People don't plan to fail, they fail to plan

So, please if you haven't already done so, start a savings plan now. And if you are still in the adoption process like us, the minute you get home with your little one get one set up.
posted by Steveg @ 10:38 AM  
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I'm Steve and this is my wife Stefanie. This is our story, mostly seen through my eyes, of the journey to create our family by adopting a child from Russia.

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