Family Finances: Now is the best time for college savings

If you don’t have a Virginia 529 already, you could start one (or someone else in you family could) and possibly win $10,000. Amanda Gibson outlines her family’s saving plan for contributing to the college education of her children.

May 18, 2015; 9:00 AM • by Amanda Gibson

Disclaimer: Virginia 529 is one of our sponsors, however, Amanda Gibson wrote this article because she was genuinely pumped about the deal.

Would you like $10,000? I KNOW, ME TOO. Well, the good people with Virginia 529 are giving away cash–lots of it–on May 29, which happens to be 529 day. See what they did there?

What the heck is a 529 and how do you get in on this cash? Step into my office, friend, and let’s talk college tuition. Call me a tiger mom, but I expect all my children to complete college. They don’t have to be doctors and lawyers–I’ll be proud of them whatever they do as long as they love it. But I am definitely grooming these little men for college. So it only seems fair that my husband and I pay a good portion of the cost.

I don’t think that parents necessarily should pay a child’s college tuition. That’s a decision that has to be made by each family based on their own values and resources. But we have the ability to pay (if we save little bits over time), so I plan to do so.

I started saving for my future child’s college education when I was in college myself, almost a decade before we welcomed our oldest into our lives. I was shopping around for credit cards and liked the rewards offered on the Upromise card, because I was already planning to have kids one day who would themselves go to college.

Yes, nerdo Amanda was sitting around college thinking of ways to save for the major purchases she would make over the next eighty years. It’s my super power. Instead of gift cards or air mileage, we get cash back rewards each month that get rolled into a 529 account.

If you’re not familiar with 529 accounts, they are like Roth IRAs but for college expenses. 529 accounts are magical piles of money that grow TAX FREE.

Maybe I should speak up: TAX FREE!!!

If you are planning to set aside money for your children’s college education (or if grandma wants to, hint, hint), you might as well look into these accounts. And if you have been thinking about doing it, this is your month because you will be entered to win 10,000 smackers.

But I already have a 529 account, and it isn’t even a Virginia account, (almost every state offers a slightly different 529 account, and no matter where you invest, you can use the cash all over the country) so I won’t be pocketing those free dollars. For your reading pleasure–or maybe horror, if thinking about the cost of college tuition gives you heart palpitations–here is the Gibson family college savings plan: Put $100 per kid per month in a 529 account from birth to college. That’s it. Easy peasy, right?

 Let’s look at the math!

When our oldest was born I rolled the couple grand that had accumulated in our Upromise education account from a decade of credit card cash back, plus a little extra, into a 529 account. I set up a spreadsheet using the following parameters:

• Twenty-nine years of faithful investing. I guessed on this number–I hope we’re able to save for those 29 years, but sometimes plans change.
• A five percent return. That is actually a lot less than the account has earned over the past five years, but who knows what interest rates and the stock market will do over the next thirty years. Plus, the account is set to automatically shift to safer and safer investments (equaling lower returns) as our oldest nears college. So five percent is probably as good a guess as any.
• Four children. This is also a guess. We have so far only produced two and a half (the half will hopefully be a whole by November).
• $12,000 per year per kid for tuition as they each go off to college. Yet another guess!

Given these assumptions, this plan will allow us to pay about $48,000 worth of college tuition for each kid. For the mathematically curious, that works out to $123,000 of principle invested and $69,000 in growth and dividends over almost three decades.

Will $48,000 pay for college? If you have a crystal ball that will reveal the exact number this will be in the future, bring it on over, I need some lotto numbers. But if $48,000 that doesn’t cover it, we will hopefully have a higher income in 20 years than we have now that will allow us to put a little extra toward the bills. But again, who knows!

Also assuming my assumptions on assumptions on assumptions, we will have effectively $69,000 worth of income on which we won’t have to pay taxes if we save with a 529 plan. Assuming (again!) a ten percent tax bracket, my best bud the 529 will save us almost seven grand.

Which brings me to my next point. A 529 only allows you to take the money out for educational expenses. That’s great if you want to make sure those savings don’t get used for other purposes. Maybe you’re the grandparent and want to make sure your gift doesn’t get siphoned off for prom dresses and first cars. Or maybe you know that if that cash was just sitting in your savings account, $10,000 would start to look an awful lot like a new kitchen.

Of course, not being able to touch the money might be a disincentive for you to use a 529 account. That is your money that you can’t use when the washer breaks or you get hit with an unexpected medical bill. Like every other personal finance choice you make, you have to weigh the costs and benefits and do what is right for your family. We’re willing to give up being able to use that money for anything other than college to save $7,000 and to have peace of mind knowing that at least a part of college is paid.

How about your family? Do you plan to help your kids out? How do you plan to pay for it? While you’re at it go see the good folks at virginia529.com and get in on that moolah.

Photo by: markus spiske

May 18, 2015 9:00 AM 2