College vs. retirement: Help yourself, then your child
Having two children in private college, and a third going in 2009, it's difficult to weigh college costs versus retirement. I used the 529 accounts, and the Upromise to help me, but in case you've got young children, the time is now for you, as I've already paid my dues.
*Upromise; While many credit card companies offer you something, if you're serious about college education, I recommend the Upromise MasterCard. You don't have to have one..and can get the pennies and nickels from shopping every day needs, but the credit card is where I found the most bang for the buck. Getting 1-2% for each purchase on the card. (before getting the card, I use to save a few dollars each month, since then, I save a few hundred simply using the card for everything each month)
College costs are extraordinarily high. The average private college now costs $35,000 a year. Public university expenses average $17,000 a year. And college costs have been rising at twice the rate of inflation.
You want to do all you can for your child. But it doesn't make sense to jeopardize your own retirement. If you do, you may need to ask your child for help meeting your expenses when you no longer have a paycheck.
A better approach is to save enough to secure your retirement finances and then save for your child's college education. You may not be able to save enough to pay 100% of your child's college expenses, but every dollar you set aside will help.
Make saving for retirement your primary goal
Though it may seem selfish, consider making the financial foundation for your retirement your first priority, says John Heywood, a principal in the Retail Investors Group at Vanguard. "There are loans and scholarships available for college," he points out. "There are no loans or scholarships for retirement."
One of the best ways to save for retirement is to participate in your employer's retirement plan by making automatic, tax-deferred contributions every paycheck. Even better, arrange to have your contribution percentage increase annually.
Try to save 10% of your annual income. If you can't meet that goal, however, at least save enough to qualify for 100% of your employer's matching contributions. Boost your contribution by one to two percentage points each year until you are contributing the maximum allowed.
Contribute to a college fund, but look for help, too
Once you have embarked on a sound retirement savings plan, turn your attention to your child's education. One approach is to open a 529 college savings account and fund it through automatic transfers from your paycheck.
Even modest annual contributions help. If you start saving $600 a year as soon as your child is born, assuming an 8% average annual return, you would have a $22,470* nest egg by the time your child turns 18.
Moreover, the money withdrawn from the 529 plan will be free of federal taxes and, in many cases, from state taxes, as long as the money is spent for qualifying educational costs, such as tuition, books, and fees. (Money withdrawn for other uses may be subject to income tax and a 10% penalty.) Some states even allow tax deductions for 529 contributions.
If your child chooses not to attend college, the money in a 529 can be transferred within the family without penalty to help a sibling, cousin, or parent pay for a college education.
There are many sources of college funding
There's no substitute for having adequate retirement savings, but there are plenty of ways to pay for college. You can also get help from:
1. Loans
2. Grants and scholarships
A Web search for scholarship databases can yield leads for scholarship sources. Students.gov* may also be a good source for scholarship—and other valuable—information.
3. Work-study programs
Your child may be able to help by getting part-time employment through the Federal Work-Study Program* or the college's own employment program.
4. Gifts
Grandparents, other relatives, and friends might want to contribute to your child's college savings plan.
5. Tax breaks
If you meet certain income criteria, you may be eligible for federal tax credits under the Hope credit* and the lifetime learning credit* programs if you are paying for a child's education. Unlike tax deductions, which reduce the amount of federal income on which you pay tax, these tax credits actually reduce your taxes if you owe any.
Peace on the Journey,
~JTG
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