the daunting task of saving for college

When my kids were smaller, people would talk to me about the expense of having four children, and I would genuinely be confused about what they meant. When they were little I was able to use hand-me-down clothes and gear from friends, and then each additional kid just use the things their older siblings did. We passed down clothing, highchairs, and infant car seats. It didn't feel like each new child was much of a burden financially.

I have to say, now that they're getting a bit older, the financial aspects of four children are a little more pronounced. Signing them up for activities can get quite expensive. And now, each of them have their own ideas about what they want to wear, and that often doesn't involve their older siblings’ clothing from two years prior.

Saving for college: the tax benefits of a 529 plan

But the most daunting aspect of having four children, when it comes to finances, is definitely when I think ahead to paying for their college. Mark and I have a huge value for higher education. Both of us have our masters degrees, and if I'm honest, my hope is that all of my children will go to graduate school as well. But at the very least, I am assuming that we will be paying for four years of college for four children. If you do the math on that, it ends up being more than we spent on our home. Yikes.

One of the things I'm really grateful for is the fact that my husband is wise with our finances. He is constantly reading investment books and educating himself on best practices for money management. He has started a savings account for each of our kids, and we actually started 529 accounts for both of our nephews as well. Hard to believe, but my oldest nephew actually went to college this year. (Cue crisis about me feeling old).

Austin and my sister in his new dorm room at NYC.

While it was bittersweet to watch him reach this milestone, I felt really good about having been able to save up some money to contribute to his college expenses. It wasn't much, but we felt good about helping him out in a small way.

Mark and I both paid for college ourselves, for the most part. We had some pretty astronomical school loan bills when we started our lives together. In fact, we just paid off our school loans last year. While I understand that some people consider having kids pay for their college to be an exercise in self-discipline, for me, it was an exercise in stress. It was really difficult for me to try to juggle a full-time schedule of college courses, while working enough to pay for living expenses and tuition. I would really like to give my kids the gift of going to college without stressing out over how to pay for tuition.

At the same time, sometimes I'm wondering if it's realistic that we could ever save the amount of money we will need to pay for each of our child's college tuition. We have set aside accounts for each of them in a 529 account, which is a tax-free college savings account. I actually met with some folks from ScholarShare last week (they are a 529 fund for Californians and they are generously sponsoring this post). They shared some of the advantages to a 529 account, and a lot of it was news to me and I thought I would share it here. Honestly, hearing from them made me feel really good about the fact that we were arty using this option. Here are some of the advantages of the 529 account:

There are major tax breaks

529 plans offer significant income tax breaks. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for college costs are federally tax-free.

It’s easy to start and easy for others to give

The minimum initial contribution to open a ScholarShare account is now only $25. In additional, anyone can give to a ScholarShare account at any time. All you need is the child’s name and account number.  (I think this may be the new birthday request from my kid’s grandparents. Is it tacky to hand out deposit slips before Christmas?)

It’s flexible

If a child gets a scholarship they can withdraw the savings TAX FREE and use it for something else. It’s great for grandparents to maintain control: If kids don't go to college, they don't get it and grandparents can redesignate the funds.

The donor retains control of funds

If you open an account, you stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds and it can be transferred to another person at any time. So, let’s say for example that my nephew Austin decided not to go to college. Instead of having to give him the money we saved, we could have simply named one of our own kids as the beneficiary instead.  This allows parents to save for education without risking that the child will blow the money on something else. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. You can even use it for your own education if the child doesn’t go.

It’s a low-maintenance fund

A 529 plan is an easy way to invest for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you.  The fund utilizes age-based portfolios, with higher risk funds for younger beneficiaries and lower risk funds as they approach high school.

It doesn’t make a huge dent in financial aid potential.

A 529 account owned by a parent for a dependent student is reported on the federal financial aid application (FAFSA) as a parental asset. Parental assets are assessed at a maximum 5.64% rate in determining the student's Expected Family Contribution (EFC).  Therefore, a child who is eligible for financial aid will most likely still be eligible, even taking into account the 529 in their name

If you live in California, I definitely recommend check out Scholarshare.  This plan has no brokerage fees. The new ScholarShare plan significantly reduces fees, expands the investment lineup, and offers online and mobile tools to make California’s 529 plan more accessible and easier to manage. Under the revamped plan, fees will be reduced by approximately 30 percent, making ScholarShare one of the lowest cost 529 plans in the country.

If I think too much about the cost of college, I can easily get overwhelmed. For us, the key will be starting early, and staying consistent.

Do you plan to pay for your child’s college expenses? Did your parents pay for your college? What’s your strategy to saving for your child’s education?

In celebration of College Savings Month, ScholarShare is running a Facebook contest two winners will receive $1,529 to open a new ScholarShare account or contribute to an existing one.  Just “LIKE” their page and then share your college savings story – could be about yourself, saving for your child’s education, savings tips you might have, anything about saving. Simply go to ScholarShare’s Facebook page and click on the Share Your Story Tab to enter. Entries must be submitted by 9/26/12.

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