Should We Pay for Our Child’s College Education?

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.

Should We Pay for Our Child's College Education

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.

Pros

  • 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

Cons

  • 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

529 Plans

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.

Pros

  • 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

Cons

  • 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

Roth IRA

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.

Pros

  • 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.

Cons

  • 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).

Pros

  • 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.

Cons

  • 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 Plan

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?

 


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Student Loans I Owe, So off to Work I go

 

“Student Loans I Owe, I Owe, it’s off to Work I go” sure could have been the theme song for the first 5 years of my career.

I am currently reading (just started) Rich Dad Poor Dad by Robert T. Kiyosaki and he writes about how many people work out of fear. They keep jobs they are unhappy at because of the fear of paying bills or not being able to keep up their lifestyle. Not that I was completely unhappy in my previous employment. I loved my co-workers like family, I had a wonderful boss, and majority of the children and families I worked with were a delight. But something was missing, an inner drive, a passion. I am guessing it was a burn-out and I just needed a change of pace and scenery, but out of fear, I stayed with the job well beyond the breaking point.

My massive student loan debt was paid off 9 months before I quit my previous job and moved to England. Believe me when I say, in those last nine months, a huge weight was lifted off my shoulders. I reduced my hours slightly and I was there because I wanted to be not because I “had to be”. I was more open to different jobs and opportunities because I didn’t have the student loans weighing me down. Because we were consumer debt free, I was able to get excited and not worry about the logistics of the finances for our “once in a lifetime opportunity.”

I know there are many, many of you who are currently weighed down by student loan debt. But I’m here to say that little light at the end of the tunnel that you can barely make out; it will be here someday soon and it will be a glorious day!

My Student Loan Debt

My student loan debt was not ugly as some, but I know it was massive compared to many. As a new graduate, I owed just under $51,000. Still applying for jobs I had to make the decision to consolidate my student loans (I wouldn’t recommend unless absolutely necessary) because that $800 monthly payment may have well been $5000, without employment. By the grace of God, I landed a job a couple months before my first “new” payment was due, of $350.

I was a young 24 year old who thought she was doing it all right. After all, I was paying extra on my student loan, investing minimally in retirement, and just bought a “new” car (loan included of course). Well, let us just say the 7 year older (and wiser LOL) Nichole wishes I had done things very differently. But I suppose things could have always been worse.

My 25 year, $51,000 student loan, with 6.75% would have ended up costing me nearly $55,000 in INTEREST if I stuck with the 25-year plan!!! Not to mention being just months shy of my 50th birthday!!! I have always been a numbers “nerd” so I knew the 50th birthday and paying nearly $110,000 back was not an option for me. So, I slowly chipped away at it with no real plan for more than three years. In this time, the principle had been chipped down to $38,000. Yes, not even averaging $4000 a year on paying it down. I wasn’t nearly intense enough. Well, my husband and I met Dave Ramsey and the rest is history. You can ready “Our Story” to get the insight on that journey.

Why Pay Extra on Student Loans?

I have heard a time or two this exact question. Maybe it had even slipped out of “young” Nichole’s mouth (shh! don’t spread the rumor! LOL). Many people think student loans are “good debt” and I “get” to deduct my interest up to $2500 on my taxes. So, why pay them off? You are going to send the bank $2500 in interest so you do not send the IRS $250???? Oh, and you are going to want to buy a house in the next 25 years, right??? Yes, your student loans will be calculated in your debt to income ratio which also impacts your credit score. If you have massive student loan debts it may determine the amount of mortgage you qualify for and your interest rate. Typically, student loans have a low monthly payment so it does not impact your debt to income ratio by a lot, but it is still something to consider.

Number Crunching for the Nerds

We will use my old student loan numbers for an example:

$51,000 for 25 years at 6.75% results in $350 monthly payment and $54,500 interest paid!

Pay an extra $20/month: cuts your loan down by 3 years!!! Just $20 a month!!! AND saves you $8000 in interest! (That’s a used car or a luxury family vacation)

Pay an extra $50/month: cuts your loan by 6 years, 4 months! AND saves you $16,155! (That is a nice used car or a down payment on a house)

Pay an extra $100/month: cuts your loan by 10 years! AND saves you $24,500 in interest!

Pay an extra $200/month: cuts your loan by 14 years! and $33,481 in interest saved! Talk about a great down payment on a house!

The point of this example is to show you even if you only have an extra $20 or $50 in your budget to send to your student loan repayment… DO IT!!! Who wants to be paying for their student loans when it is time to start thinking about retirement???

Speaking of retirement… let’s for a minute pretend you were able to come up with an extra $200/month and pay off your student loan 14 years early. Once it was paid off, you invested this 200 for retirement for those 14 years. At 8% average returns, that $200/month becomes over $100,000! Invested until your are retirement age (not another dime invested after the 14 years), it becomes just shy of a HALF MILLION DOLLARS!!!

Are your student loans stealing your retirement?

HERE is a tool to calculate your student loan, “debt snowball” from Tuition.io

Tips to “find” an extra $20-$50 to pay off your Student Loans Early

  • Compare insurance companies to get better rates
  • Eat at a restaurant one time less a month
  • Car pool to work once a week
  • Buy store brand groceries (I promise you can’t tell the difference on majority)
  • Reduce your cable or cell phone package to “basic”
  • Sell household items you no longer use
  • Reduce your paper goods use (paper towels, paper plates, plastic wear, etc.)
  • Use DIY Homemade Cleaners and Detergents
  • More Ways to Save at the Grocery Store

 

Is Tackling Your Student Loans one of your Goals this Year?

via socialtik

You have decided once and for all that you have had it with your student loan. You are ready to kick Sallie Mae out, after all she has over stayed her welcome. But you look at the total of your student loans… whether it is $20,000 or $50,000 or $100,000… the end may seem like it will never get here. Trust me, it will. The harder you work the more focused you are, the faster that day will get here.

It is difficult to remain optimistic and focused. When your student loans are more than your annual salary or a high percentage of your salary it may seem like getting rid of your student loan is just a dream.

Don’t give up hope. Keep your focused intensity. The moment you send that last payment will be one of the best moments in your life. My favorite piece of paper is the letter I received that states my student loans were “paid in full”. This might sound horrible because I do have two degrees and a marriage license that are all pieces of paper in my collection. Although, I am proud of my hard work to earn my degrees and my marriage license is a symbol of my love and commitment to my husband.

The “paid in full” letter gave me freedom. Freedom to dream of better tomorrows, freedom to pursue my passions and not just stay with a job because I was still paying for my degree. Freedom from massive interest rates. This freedom has brought me so much peace and relief of financial stress. You will feel like a new and improved person once the weight of your college loans are removed from your shoulders.

Strategies to Remain Focused

  • Figure out an approximate “Payoff Date”. This will help you remember there is an end in sight. Your sacrifices, 2nd jobs, eating rice and beans are NOT forever.
  • Find ways to gain more traction: Sell something or a lot of things, cut out a monthly expense from your budget, pick up over-time or a weekend shift.
  • Break-up your debt into small achievable goals. You can break it down to every $5,000 or $10,000 increments. I preferred to celebrate  when my daily interest got under certain points. For example: when I was paying less than $5/day in interest on my student loan.
  • Celebrate or reward yourself when you reach these small achievable goals. Perhaps reward yourself with something you are sacrificing… those fancy lattes or going to the movie theater.
  • Make a visual countdown/thermometer. I love visually seeing the progress after setting up a payment. We have our mortgage pay-off visual posted on our fridge. I see it daily and am reminded why we are sacrificing now.
  • Bottom line… you have to want your freedom bad enough to make the sacrifices for a short period of time to be able to “live like no one else” once you are DEBT FREE!!!

What are your strategies to remain focused and motivated?