Our little girl is 4 months old (time is flying!). We want to make sure she has a quality college education when she grows up, and what better way to do that than to put some money aside today that could grow into a large sum in the future?
But how on earth does one save for a child’s education? Do you simply put money into:
- a savings account?
- savings bonds?
- a money market account?
There are so many options, it can really be quite terrifying to decide what to do. Because of this, many people simply do nothing. They fully intended to put something toward their child’s education, but suddenly, in the blink of an eye, their son is 18 years old and there are only two options for him:
- Take on a massive amount of student loan debt, or
- Don’t go to school
DO NOT BE THIS PARENT. If you have a child and you want to help them with college tuition, then learn how to save for your child’s education and then START TODAY!
How to Save For Your Child’s Education
Yes, you could save for your child’s education with a savings account, with savings bonds, with stocks, or with a money market account. But are these the best options? Without going into laborious detail, the simple answer is “no”.
For most states, there are two methods:
- A pre-paid tuition purchase plan
- A college-direct investment account
Both of these options are referred to as 529 plans, but they are actually quite different in practice.
1) Pre-Paid Tuition Purchase Plan
Pre-paid tuition plans are exactly what they sound like. You pay for your child’s education today so that they can go to college for free at a future date.
In Michigan, these plans are called MET’s (Michigan Education Trust). When you put money into this trust, you’re purchasing college credit hours at today’s price. With this particular plan, you pay a rate of $571 per credit hour. Put $571 into the account this year and your child gets a free credit hour when he/she starts school. Invest $1,713 today and you’ll earn your child a 3-credit class.
It’s pretty straightforward, but there are definite downsides to this plan.
First, these pre-paid state plans are often only good for your state. If Junior decides that he wants to go to school in Maryland, then all that saving you did was for nothing because the money can’t be used out of state.
Second, the pre-paid credit hours only save you from tuition inflation. In other words, by paying today you’re avoiding paying more later (because college costs are sure to go up), which sounds like a wise move until you consider that the tuition inflation rate is estimated to be 5% or less, and a market investment could yield you more than 10%.
Third, this plan only covers the cost of tuition. Books, room and board, and supplies need to be covered out of pocket.
In short, the MET is better than a putting your money into a savings or money market account, but there are definitely limitations here. So many, in fact, that I never recommend this option to my friends or family.
Almost every state offers this second option, which is a college-directed investment account. It’s almost like a 401k for your child’s education. You simply invest the money, decide what type of funds you put your dollars into, and then watch it grow!
In Michigan, this fund is called a MESP (Michigan Education Savings Program). You can start a fund today for just $25. It only takes 15 minutes to fill out (I’m actually funding Addi’s college fund right now!) and you can even set up automatic withdrawals (here’s the form) so you don’t have to mail in a check every month.
While this fund will likely give you more bang for you buck (vs. the pre-paid option), there is a major risk involved: There’s no guarantee that you’ll earn money in a College Directed Investment Account. In fact, you could actually lose money here because the fund rises and falls with the stock market.
It sounds scary, BUT you have to remember that you’re investing over the course of 15 years or more and it is INCREDIBLY unlikely that the stock market will be down for 15 years straight. More than likely, you’ll earn 8% or more over the course of your investment, which is why I typically recommend this method to save for your child’s education.
Why You Should Save For Your Child’s Education Today
So why am I jumping all over you to start investing for your kid’s college education? Is it because I’m being paid by MET or MESP? Definitely not. I am earning ZERO DOLLARS to write this article.
I want you to save for your child’s education for FIVE reasons and all of the reasons benefit YOU.
- It grow tax free – Your initial contributions aren’t tax deductible at a federal level, but the earnings will never be taxed, which is an amazing benefit, especially when you’re talking about tens of thousands of dollars in growth!
- You won’t be able to save more later – Kid’s only get more expensive as they get older. If you don’t start contributing today, then you almost certainly won’t find the money to do it later either.
- Compound Interest – The earlier you start, the more compound interest you’ll earn. Case and point: Invest $10,000 today, it will be worth $40,000 in 18 years. Invest $10,000 when your kid is 8, and it will only turn into $21,500.
- It only takes $25 – Everyone has $25, which means no one has an excuse. Isn’t your child’s future worth twenty-five bucks?
- It’s easy to put off – Contributing to a college savings plan is kind of like writing out your will. You don’t quite know how to do it, and it sounds like absolutely no fun to tackle…so you put it off. DO NOT put this off. Save some money for your kids! You won’t regret it!
Will you begin to save for your child’s education?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.