Parents tend to have a strong opinion on whether or not they should pay for their child’s college education. So it should have not been a surprise that my husband and I had vastly different opinions on this topic.
It is no secret around here that my husband and I are huge supporters of the Dave Ramsey plan. We have implemented it in our life over the past four years. In Dave Ramsey’s “Baby Steps,” saving for college is baby step number five, between saving 15% for retirement and paying off the mortgage early. These three baby steps are tackled simultaneously.
We have been on these baby steps for THREE YEARS!!! Throughout the majority of this time we had no intentions of saving for college for our maybe, someday child. However, we definitely had many “what if” discussions.
Difference of Opinions: Should We Pay for Our Child’s College?
My husband believed the child should pave his/her own way and earn/work hard for everything they receive, including a college education.
I wasn’t so sure. That weight of having nearly $50,000 of student loan debt hanging around my neck. You know the one we just paid off six months previous. Was still very fresh in my mind. I knew I wanted something better, something different for my child.
Our differing viewpoints made sense from where our young adult lives had led us. My husband joined the military at 18 years of age and started with literally nothing, financially speaking. He has worked and paid for absolutely everything in his entire adult life.
I on the other hand entered college at the ripe age of 18 years. I received many academic scholarships and grants to help pay for college. As well as savings, summer jobs, and a part-time job during college. My parents did help financially by covering my car and health insurance. My dad had an unfortunate work-related accident my freshman year of college, leaving him permanently unable to work. Meaning my parents were in no position to help pay for my college expenses.
I completed my Bachelor’s degree owing less than $10,000 in student loans. However, I immediately began graduate school and racked up $50,000 of student loans!!! Could have I lived more frugally and came out with less student loans? Absolutely! However, I could have also lived irresponsibly and easily ended up with $80,000+ too!
Changing of Opinions
I agreed with my husband’s view that children should work and earn things they receive. However, I also believed that I had worked for and earned my degrees. However, I did so by also accumulating debt. A burden I would not wish on anybody, especially my own child.
Over many conversations during the next few years our opinions became closer to the same. I frequently reminded my husband of the student loan debt that burdened our first year of marriage. He frequently reminded me that things are appreciated more when it is earned.
I emphasized that a good portion of my college was paid by grants and scholarships that required a “financial need.” A criteria that our child will definitely not meet considering our incomes and assets. I also shared that the cost of a bachelor’s degree is predicted to be $100,000+ by the time our child is college age.
We slowly over many months and discussions, agreed on a middle ground. We would expect our children to save for college and work part time and summer jobs while attending college. We would cover the “big” expenses, such as tuition and rent. Our child would be responsible for books and all other living expenses (utilities, food, car, etc.). Of course we will set guidelines and expectations in order for us to continue to help financially.
Yes, eighteen years is a long way down the road, but at least we have a plan. We will not wake up on his 16th birthday and say “oh no, he is serious about attending college. How are we ever going to pay for it?”
College Savings Options
Now that we are committed to paying for some of our child’s college education expenses. What are our options and what option is best for our situation?
Education Savings Account (ESA)
An ESA is a tax advantaged savings account for education expenses. Meaning you do not pay taxes on the earnings of the account as long as the funds are used for educational expenses.
- More variety in investment options
- More control over those investment options
- Can be used on educational expenses from kindergarten to college
- Can be transferred to a family member
- Contributions limited to $2000/year
- Income Limitations for Contributors ($110,000 single, $190,000 married (2016))
- Must be used before beneficiary is 30 years of age
- A 10% Tax Fee + Income Taxes on earnings if not used on qualified educational expenses
A 529 Plan is also a tax advantaged savings for educational expenses. There are several different types of 529’s so you need to be diligent and fully research the 529 plan you select. They range from pre-paid tuition to investment options similar to an ESA.
- No income restrictions for contributors
- No time limitations for beneficiary to use funds
- The maximum yearly contributions is much higher than an ESA
- Some have state income tax advantages
- 529 plans vary significantly in investments, fees, and rules. You must completely understand the 529 you are purchasing.
- Limited control over investments
- Can only be used for college expenses
- Excessive contributions can have gift tax implications
A Roth IRA (Individual Retirement Arrangement) is a tax advantaged investment account generally used for retirement savings. You contribute after tax dollars and do not pay taxes on distributions. An account that was established 5 or more years ago would be eligible to use contributions (not earnings) for educational expenses. Or if you are 59 ½ years of age you can use the distributions as you please.
- If your child does not attend college or does not need assistance with paying for college. You can continue to invest this money for retirement.
- No age or time limitations to use for educational expenses
- Roth IRAs are not included as an asset on the FASA application.
- Only what you contribute can be used for educational expenses, not earnings from your investments.
- A Roth IRA can be a significant instrument to retirement investing and you are “unplugging” this investment. This could hurt you at retirement time, BIG TIME!
- Income limitations for contributors ($117,000 single, $184,000 married)
GI Bill for Military Families
There are two different GI Bills that are transferable to children, the Montgomery GI Bill and the Post 9/11 GI Bill. Under the Montgomery, full-time students currently (2015/2016 school year) receive $1789/month for all college expenses. Under the Post 9/11, full-time students currently (2015/2016 school year) receive 100% tuition coverage at eligible schools (or a set maximum for expensive private schools), basic allowance for housing (BAH)(E-5 with dependents at school’s zip code), and a yearly books and supplies stipend (up to $1000).
- Could potentially cover all educational expenses of a 4-year degree with the 36 months of benefits
- Can be partially used by different family members
- You do not pay (monetarily) for this benefit. Leaving more money in your budget for retirement investing.
- This is a military benefit which may be altered or taken away from service members in the future. There is already talk of eliminating the transferability of the Post 9/11 GI Bill (in particular the BAH) to spouse/children possibly in 2017. If you plan on using this method to pay for school. Your best bet is to get a partial benefit transferred NOW! In hopes that the government will at the very least allow those already enrolled to be grandfathered into the current benefits.
- Children must use the benefit by the age of 26 years (Post 9/11) or 10 years after the service member leaves active duty (Montgomery).
- Service member must commit to 4 more years of service to transfer benefit (Post 9/11).
Our initial plan was to use an ESA for college savings. However, thanks to Jen over at Pay Yourself First and the VA representative at the Bundles for Babies class I attended earlier this month. I was encouraged to research further into the benefits of the Post 9/11 GI Bill. My husband currently had the Montgomery GI Bill.
After research and several questions it became quite obvious that we were better off transferring my husband’s Montgomery GI Bill to a Post 9/11 GI Bill. My husband already was committing to another 4 years of service because it was required for him to accept his next assignment after England. So, once our baby boy is born. My husband will transfer partial benefits to baby to make him eligible for future transfers of educational benefits.
There are of course the “what if’s.” What if my husband needs his GI Bill benefit to finish his own education? What if the government takes away some of the benefit? What is our plan B?
We have a couple of ideas.
Our first thought is to focus on retirement. If we heavily invest for retirement over the next 18 years. It will not be a big deal to dramatically decrease our retirement contributions for 4 years while we cash flow a portion of our child’s college education.
We have also thought about investing into an ESA. If we have more than one child or my husband needs to use his GI Bill benefits. We will need some type of investment college savings plan.
There would be a penalty for not using this money for educational expenses, but it is not too horrible. Say we invested $36,000 which resulted in $40,000 of investment growth for a total of $76,000. The tax fee is 10% of the earnings, being $4000 with this example. The $40,000 would also be held for income tax. So let’s say our son pays 25% income tax when he distributes the ESA. That would be an additional $10,000. So, he would still end up with $62,000. Sounds like a great down payment on a house to me!
OR if our son has children or a spouse before the age of 30 he could transfer the ESA into their name. They could use it for college expenses and not be required to pay the taxes and 10% tax fee. How great would that be? Paying for our grandchildren’s college educations! Sounds like we just might change that family tree after all! 🙂
The good news. We have plenty of options and we have a plan.
What do You Think?
Do you plan on paying for your child’s college education?
How will you pay for your child’s college expenses?