Sunday, June 3, 2012

Is it too Early to Save for College?

I recently read an article about a guy who is stuck with $142,000 in student loans.  This article was a frightening account of this guy's dream of pursuing a career in the culinary industry.  He took out a bunch of private, non-government subsidized loans to pay for his education.  My husband and I have watched a lot of Suze Ormand's show and one of her big take home messages is that in regards to student loans, "current federal law prohibits a bankruptcy court from discharging your debt. That is, your student loans—both federal and private-stay with you even after bankruptcy."  This is the scenario this poor guy is facing.

It is estimated that a baby born in 2012 will be paying up to $442,000 for a 4 year bachelors degree in a private college in 2034!  $442,000 is on the higher end but the average-priced private college would still cost $232,000 and $81,000 for the average priced public university.  That is "up 111 percent and 167 percent, respectively, from the average class of 2012 tuition."

Obviously, we all want the best for our children and want them to avoid having them encounter a scenario like the one mentioned above.  With a toddler and another baby on the way, I feel like it is almost necessary that I start saving for college NOW.  The options available today are quite confusing.  Suze does a good job of briefly summarizing the options available to parents like me.  There are basically 3 options available:
1. UGMA (Uniform Gift to Minors Act Account) or UTMA (Uniform Trust to Minors Act Account)
2. Coverdell Educational Savings Account
3. 529 Plan

Thinking about saving for college when your children are in diapers can be a bit daunting.  However, it appears that saving college is something I can start doing now.  The first option may "count as an asset for the child and will have a negative effect on financial aid qualifications."  Therefore, this doesn't sound like an attractive option.

The second option, the Coverdell account sounds reasonable if income restrictions are met.  A maximum of $2000 can be saved per year which is about $167 per month or $5 per day.  This seems doable even with multiple children.

The third option, the 529 plan, allows you to contribute an unlimited amount of money annually (but contributions greater than $12000 are subject to a "gift tax").  Apparently, people like myself have been overlooking the 529 plans.  "A 529 plan is a tax-free savings fund that can be set up for anyone heading to college. There are two main types: A prepaid tuition plan (the only kind higher education institutions can offer) and a savings fund."  Since this is considered an "asset of the parent," it may not negatively affect financial aid qualifications in the future.  Until I had children, I did not even know that such a program existed.  There is a great website called that explains what a 529 is and since it's a state-run program, lists the options available by state.

Unfortunately, even with extensive planning, my children may still have to take out loans to finance their education in the future. has great information about loans and paying off student loans.  I do not want my children to have to face the dilemma facing the poor guy mentioned in the story mentioned above but hopefully if I start planning now, they won't have to.

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