Filling Your Child’s Piggy Bank

Less than 2 weeks ago, we celebrated my son’s 1st birthday. It was an occasion to remember, but one I’m glad has passed. The stress of baking and decorating, and making sure everything was perfect for those pictures were a little more than I needed. I was so relieved when the last thank you card was written and in the mail. At the end of it all, we were left with some great memories, a pile of toys and about $50 in cash. Cleanup was easy. Gift bags were folded and put away for a later use. The gifts went into his playroom to be lost among the other toys. It was the cash that left my husband and me scratching our heads.

I’m sure some parents would pocket the cash or spend it on their little one either necessities or leisure, but after giving it some thought, we really wanted to be more purposeful in any money our son starts to receive as gifts. After all, the gifts are for him, and not for us. So, we made the decision to start saving any money he receives and putting it in a college fund for the future.

A lot easier said than done!

Did you know that in 17 years, when my son goes off to college, a school that currently costs $20,000 annually will have an estimated annual cost of $58,899? That’s $235,597 for 4 years of tuition plus room and board! I graduated from college almost 6 years ago, and I know tuition has increased significantly since I graduated, so I was curious what schools this current tuition price would fall under. After all, I don’t remember paying $20,000 a year for college! Surely they’re talking about your southern Ivy Leagues or private schools.

What I found was surprising. Below is a sampling of public and private schools in Texas along with their average tuition cost plus room and board for living on campus.

–          UT $23,596-$24,936 (2010-2011)

–          Rice University $34,900 (2011-2012)

–          Abilene Christian University $38,250 (2011-2012)

–          Baylor University $20,620 (2011-2012)

–          Sam Houston State University $19,590 (2010-2011)

This means, that the estimated cost of $58,899 by 2028 is on the low end for a state public or private school. So, we should actually be anticipating more; especially if we want to entertain the idea of our child attending a graduate program or Ivy League.

So, how do we afford this (besides liquidate our home)??

Forget the basic routes our parents used of opening up a standard savings account at your local bank. Interest rates are so low; you might as well, just put your cash in your child’s piggy bank that sits on the shelf. To help prepare for this amount of tuition, most financial advisors would agree that investing in a college plan or mutual fund is the way to go, and there are 2 popular ways of doing this.

1)      Gerber Life College Plan: You may have seen this advertised during daytime programing. Basically, this plan is an endowment; a term life insurance policy taken out on your child backed by Gerber Life Insurance Company. You designate a specific amount (between $10,000-$200,000) you’d like to insure, and you’ll make monthly payments for the amount of time you’ve specified (between 10-20 years). At the end of that time, you can remove the agreed upon amount to use towards education or other purposes. The upside: It’s guaranteed to never lose value. The downside: It’s all taxable earnings. Meaning, each year, you’re paying taxes on what you’ve contributed.

2)      529 Plans: This is a mutual fund investment headed up by the state. You start with an initial minimum investment (can be as low as $10) and select how you want your money to be invested (fixed, high risk, low risk, etc.). When your child turns 18, money can be removed without any federal taxes or penalties as long as it’s being used for education expenses only (vocational schools, 2-4 colleges, graduate schools, and even some abroad). Each state offers their own 529 plans, so you can be flexible in where you invest your money. (For example, New York might offer a higher interest % than Florida, so even if you have a child living in Florida, you can open up a 529 in New York, and send them to college in Michigan.) The upside: You can change beneficiaries on the account at any time. You can also withdraw earnings if the beneficiary receives a scholarship (up to the scholarship amount) without penalties. The downside: Mutual funds cannot guarantee there won’t be risks, but you can control how risky you want to be.

Depending on your financial situation, there are 2 other ways you can invest in a college savings plan for your children:

1)      Coverdell ESA (Education Savings Accounts): These are a type of savings account with contribution and income restrictions. Similar to a 529, these accounts can only be used for elementary, secondary, and higher education expenses. The upside: Upon withdraw from the account; all investments are federal tax free. You can also be flexible with the beneficiaries. The downside: In order to qualify, you must make less than $190,000 annual gross income for joint filers, and cannot contribute more than $2,000 annually for all ESA’s under that child’s name. The contributions must stop by the time the child reaches 18, and all funds must be withdrawn by the time the child reaches 30.

2)      UGMA (Uniform Gifts to Minors Act) /UTMA (Uniform Transfers to Minors Act) Custodial Accounts: These accounts are very similar to a “trust fund”. A portion of the earnings placed into these accounts are taxable at a student’s rate. The upside: There’s no limit to the contributions and there’s unrestricted use of assets as long as it’s for the benefit of the child. The downside: Once the child turns 18, the adult loses control of the account, and it cannot be transferred to another child. Be aware. This type of savings would affect an application for financial aid.

So, there you have it! College savings plans summed up in a small post, but please don’t use this as your only decision maker when trying to decide on how to best save for your child’s future. Although my husband and I aren’t financial planners, we took our time and did our research before deciding on what works best for our family. If anything, I hope you take away from this article, that giving some thought to your child’s educational future is important, and could significantly help you in the future!

Have you started saving for your children yet? What helped you to make the decision on how much to save and where to save it?