Sadly, my parents never saved for my college education. This non-action directly affected my eventual college destination as well as the way in which I would eventually pay for college.
So how did I pay for college? I’m paying for it now; paying off student loans for at least a few more years.
I love my parents, so I hope this post doesn’t come across as illustrating some deep-seeded, unresolved issues. Instead, I’m simply making some objective observations about the risks of not saving for college, and the rewards for planning ahead.
Not Saving for College has Big Side-Effects
I know that not everyone will fall into the same collegiate and financial situation that I have experienced, and the math won’t work out the same for everyone. But even the smallest amount of financial planning will help make a dent when faced with paying for college.
I’ve crunched the numbers in my own situation and found that, if my parents had saved $78 a month for 18 years even in a modest mutual fund, I would have zero college debt to repay (assuming there was no market crash in the years before I graduated high school).
There are two things that frustrate me the most about my parents lack of a college savings plan. The first is that if they had made the correct financial decisions, like creating a budget and spending wisely, there was plenty of money to put back for college.
The second most frustrating thing about not having a college savings plan is that the money I’m paying for my own student loans could be going to bulk up my my son’s 529 plan. I can’t get over the fact that my loan payments feel like a wasted opportunity.
What is a 529 Plan?
Put simply, a 529 Plan is a tax-sheltered college savings plan. These qualified savings plans are meant to encourage families to think of their kid’s futures and save for college. These plans are authorized under section 529 of the Internal Revenue Code, which is where they get their name.
Think of a 529 plan as a shell – a shelter that keeps the tax rain off of you. Within that shelter, you can invest in mutual funds, individual stocks, bonds, and a slew of other investment opportunities. The 529 plan isn’t the investment itself, it’s just the shell that holds the investment and offers you tax protection.
529 plans give individuals an unparalleled tax incentive. Although contributions into 529 plans are’t tax deductible on your federal return, the money grows tax-deferred within the account and distributions which pay for the beneficiary’s college costs are tax free.
This means that all of the growth your money sees within your 529 plan is 100% yours.
Is Saving for College Right for You?
Yes. Although I could stop right there, I guess I’ll elaborate. If you have kids or want to have kids, and you want to give them the chance at a college education, start saving right now. There are plenty of financial institutions that offer low or no starting balance, and no minimum balance.
Worried about fees? Again, there are plenty of highly reputable financial companies offering college savings plans with low or no start-up costs and very minimal fees.
Don’t worry about saving hundreds of thousands of dollars, not everyone will be able to offer their children six figures for college. But every little bit helps.
Don’t make the decision not to save if you can’t cover the total costs of a 4-yeareducation. Instead, make a significant;y positive decision for your children’s future educational expenses and open a college savings account today.