As long as I can remember, my parents wanted my sister and me to go to college. It was a thing. I know many people have this ambition for their children, but my parents were really so adamant about a college education that growing up my sister and I played school and college for hours on end.We had a two story house and used to pretend we were riding the bus (the stairs) to college and what classes we were going to be taking.
Fast forward about twenty years and here I am with a college degree in hand and still paying it off. Like many American households we have student loan debt, and it has definitely impacted our lifestyle choices for the past 5 years. We will have our student loans paid off in about 2 years from my calculations which is faster than the term, but still, I cannot wait to write that last check.
My sister and I also both graduated from college the same weekend in 2008, and I know that a dream of my parents’ was fulfilled. I am so grateful to my family and my husband’s for helping us through the college years alongside our student loans. And don’t get me wrong — I do believe that the student loans I took out in college were well worth the money, as I attribute so much to my college education. But I can’t help but want to set my children up for an easier path post-graduation; not to hand it to them, but to relinquish a giant financial burden that my husband and I have navigated the past five years. We will still expect our daughters to contribute to their education and would distribute the money with a reasonable budget for them, teaching them financial success that we had to learn in a more difficult way.
With the average college graduate owing about $30,000 after graduating (according to CNN money), I want to make sure that my daughters each have a nest egg available to help them as they responsibly pursue a degree. My husband and I recently both read Dave Ramsey’s The Total Money Makeover and I’d like to share some very valuable formulas for figuring out how to save for college if you plan to do so.
First off, let’s talk about ESA’s or Educational Savings Accounts, the “Education IRA” as it is nicknamed. You can contribute up to $2000/child per year tax free if your family income is less than $220k/year and if you put this into growth stock mutual funds, which Dave Ramsey attests average a rate of 12% over the long term, you will have roughly $126,000 by time your child turns 18. Tax Free! That is only $166.67/mo. I think this is completely doable. If you start these accounts before your child turns 8 you will have your child’s college pretty much under control by time he/she is 18. Doesn’t that sound wonderful?
Ramsey also sheds some light on saving even more than that at a quicker rate if your children are already older or if they plan on pursuing a Law degree or PHD. He recommends first maxing out the ESA fund each year and then utilizing a 529 plan. However, he only recommends a “flexible” 529 plan as opposed to a “life phase” or “fixed portfolio” plan which give you less control of your investment; so be extra careful when researching 529 plans.
I highly recommend reading The Total Money Makeover especially if you are interested in financial planning. Ramsey shares really cool tips on how to calculate exactly what you need to budget for. Here is a formula to give you some idea of how much you’ll need to save for college:
Step one: figure out how much you need.
cost per year (around 15k-25k) x 4 years = nest egg needed
Step two: calculate your monthly savings needed to account for inflation.
“To achieve the nest egg you will save at 12%, netting 8% after inflation, so we will target that nest egg at 8%”
nest egg needed x factor= monthly savings needed
Here are the factors based on your child’s age courtesy of The Total Money Makeover. You can use these formulas to calculate what your savings will need to be if you start your college fund at different ages.
Do you have a plan for your kids’ college education?
blogger / nectarine / 2600 posts
We have a 529 I think for the kids and Im the first to admit Im a dummy when it comes to finances and DH handles most of our stuff so I sent him over this info to read. I am lucky as my college was paid in full by my family and through some inheritances my kids have a great head start already for college.
wonderful pomelo / 30692 posts
I need to do this!!!! Thanks for the reminder!!
kiwi / 550 posts
We have a money jar that we call the college fund but we definitely need to do this. Forwarding this to my wife. Thank you for the info!
kiwi / 511 posts
My DH and I need to set something up soon for our two little ones so this is a good reminder note.
Do have a question do you factor in having your child work to help pay for their college? I worked summers and school breaks (2 part time jobs) to help pay for college. In addition I was an RA which was a great way to reduce my college bill, and also worked on campus.
My parents gave all of us (4 kids) a set amount of money for college each year (the amount is not important because each family has their own circumstances), the rest was up to us to get in scholarships, grants, loans etc. They also set us down with loan calculators to show us how much a loan would cost over the time period and counseled us to factor that in during our college decision making process.
Honestly having to hustle for grades and money taught me a lot about time management, finances, and the real world. Coming out of college I will admit I carried a pretty high debt load, it was the equivalent of one year’s tuition. But again I hustled to pay it off, I worked overtime when I could at my job, I lived with roommates, and continued to live frugally.
I goal of mine is to extend this same learning experience to my children.
Oh and I paid the loans off early too. The saving for college plan is great, and I forgot that we were encouraged as kids to save for college as well. The whole process can be a great way to teach your kids about the reality of budgeting, finance, and delayed gratification. You can do this at age appropriate stages of course, so you don’t have to freak an 8 year old out about how much more you pay for an item when you take on a loan rather than paying for it upfront.
wonderful pear / 26210 posts
I think the biggest unknown in this equation is the future cost of an education. For example, my 4 year degree cost $100k. Now, that same 4 year degree costs $250k. I have seen projections that a private education when my son attends in 15 years will be $500k.
I hate to admit it, but at that cost, I can not see how a college degree is justified.
pomegranate / 3225 posts
This is a great post! I have a 529 for LO but I had not heard of an ESA. The cost of a college education is a huge concern, especially since DH’s parents and mine paid for ours 100%, which is something we would love to do for our LOs if possible… yikes.
grapefruit / 4671 posts
It is worth mentioning that when considering ESA vs 529, the fact that ESAs are not tax deductible can have an impact on family finances.
blogger / kiwi / 675 posts
@looch: I completely agree with you. I am planning to save as much as possible but who knows where that money will end up. It may go towards something different career-wise for our daughters if college tuition is astronomical at that point. Excellent point. Something I thought of while writing this but have no idea how to project…..
blogger / kiwi / 675 posts
@Mrs.Maven: I love your ideas here. I think college is an excellent segway into the real world. A great way to learn about finance and responsibility. I didn’t factor in a specific amount for my kids to earn while in college but as LOOCH pointed out, I am sure that whatever our nest egg amount is for financial planning; we will likely come up short in the future so there will definitely be room for the girls to earn and help.
blogger / nectarine / 2600 posts
@looch: I totally agree with this too. College prices have risen at an astronomical rate the last ten years. If college is half a million dollars Ill be honest my kids are going to have to pay most of that on their own there is no way we can afford that. Itll cost a million to send them all to school and thats impossible
coffee bean / 41 posts
This is an awesome post! I love all of the information you’ve included and I’m sharing it with others.
guest
I think the most important thing is to start saving as early as you can and stick with it.
It sounds like you have a good plan in place, but please don’t rely too heavily on Dave Ramsey’s 12% projections. He has some great advice on getting out of debt and saving generally, but from what I recall (and it’s been a while since I checked out his site) his figures are based on a very long-term average and assume you are fully invested in a very aggressive stock portfolio for the entire time. While that amount of risk may be fine when your kids are 5 you need to consider whether it’s appropriate as they get closer to needing the money. Imagine if you had been fully in stocks with a student starting college in 2009 – your savings would have taken a huge hit and you would have to start withdrawing this money to pay for tuition before your investments had rebounded.
I do my planning assuming a 6% annual growth. Our education funds are heavily weighted towards stocks now that the kids are small, but I think 6% is a more realistic number that takes into account the fact that we could have another bear market before they start college and because I plan to move to more stable investments (bonds, cash, etc.) when they are within a few years of needing the money. Of course, I am hoping for higher returns (currently up 18% over the last 12 months) but I’m planning so that we’ll be in a comfortable position if 6% is the best we get.
blogger / eggplant / 11551 posts
Interesting post!
I’ll have to reread The Total Money Makeover because I must’ve not paid careful attention to the ESA part! We have 529 accounts setup for both kids for now, but not much goes into it each month. I don’t think we’ll be able to cover both their educations in full with the astronomical college tuitions these days, but we’re hoping to help them out with at least some of it and have them work their way through college.
kiwi / 511 posts
I agree the 12% is very ambitious and I would not count on that, I would go 5-6% but if I wanted to be ambitious I would only be expecting a 8-9% growth.
One other thought to help add to those funds is enlist those would be gift givers such as parents and siblings. For our kids the first few years they don’t need much so the kids get a token gift, small toy or book but the bulk of what their grandparents would spend on a gift goes into their savings account. It helps keep down the clutter as a bonus. As the kids get older and are more into getting presents this shifts a bit.
blogger / nectarine / 2010 posts
That formula is super helpful! I know when I went to college it was 35k the first year and 42k by the time I graduated. So I just calculated for $150k and that’s a lot of money every month! Really eye opening to see the hard numbers regardless of how much you’re saving.
Don’t forget there’s always our service academies! My DH and his brothers went to the US Naval Academy and got excellent educations – his parents bought a big summer house right on the water with money they had set aside for colleges! So “free” education and a great spot to gather together as a family. Win-win.
cherry / 187 posts
We feel really strongly about saving for college for our little ones as well for similar reasons. My husband had loans for his 5 year architecture program to an out of state school that ended up being around $125K in debt! Architects do NOT get paid very much for many many years so this was a poor choice and I wish his parents had helped him with financial planning when he chose his college. Anyway, almost 10 years out of school, we’ve got about $20K left based on some major major extra paying. I want to avoid this burden for our kids.
That said, our financial planner did NOT recommend specific education financial vehicles because she felt that we were better off saving money that we could use for retirement should we need it at the same time as college. You never know what will happen and you can’t use a 529 for that, but a child CAN take a loan out for school.
pear / 1614 posts
We have 529s for our kiddos. I agree that working and saving for yourself, even taking out some loans, can really help teach responsibility etc. But we hope to contribute, at least. My 10 years of higher education (college, grad school, med school) left me with over $300K in student loans since my parents were not able to save, contribute during school, or take out loans for me. Payments on these loans now has a big impact on our lifestyle, and one of my motivating factors for saving for the kids is to allow them to make career and life choices based on their dreams and goals rather than on how they can pay off student loan debt. My husband had his college completely funded by his parents so we are very lucky to only have one set of loans to deal with. However we both seem to be equally responsible, financial and otherwise, for whatever that’s worth
blogger / kiwi / 675 posts
@tipperella: couldn’t agree more! I too went to architecture school and you are so right you don’t earn much money for many many years which is a major negative…especially with the economy being what it is today.
coffee bean / 48 posts
Arg I’m so undecided on this. I feel like we’re on the cusp of a complete education revolution with the pervasiveness and richness of information on the internet. I feel like if traditional universities are still the standard 18 years from now it’ll be a huge disappointment, at least for me. Or maybe it’s just a pipe dream that someday education will be free. Sigh, I think I need to bite the bullet and sit down with a financial planner.
blogger / pineapple / 12381 posts
I had to, at times, work 40 hours a week while going to school full time in order to survive during college. Needless to say, it impacted my grades and put some of my dreams on hold (but never killed them). It would have helped if there was something there for me to fall back on. Given that I went to undergrad, grad school, post-bacc and medical school, it is no surprise that I owed around 150K after completing school. It could have been much more if I didn’t pay my way through undergrad and part of grad school. You can’t really work during med school!
I especially worry that my girls won’t qualify for any financial aid, which will make things even harder for them if we aren’t fully prepared to shoulder the burden. We used some of the online calculators and made some worst case scenario assumptions.
They’ll still know the value of a dollar, but not at the expense of their grades
guest
Also worth noting – ESA’s can be used for educational costs before college, such as private school tuition and educational software/computers. The 529 is for college only.