Stuffing the College Cookie Jar

December 21, 2010, By Steve Thompson 1 comment

Thinking of college terrifies me. Not my own, of course, because that's long over and done with, but my kids' college, which gets closer every year. When I was in college, I had to pay for it all out of pocket, and by the time I graduated, I found myself in tremendous debt. Not the best way to enter the "real world." That's the last thing I want for my kids, who deserve to start their professional careers without the crushing weight of student loans and credit card debt. Even though what I want is clear, getting to that point isn't easy. College is an extreme expense.

Fortunately, I started taking steps early to help them avoid the crushing debt I experienced long ago. Here are some suggestions on how you can take some early steps to avoid the pain later on.

College Savings Plans

A 529 college savings plan might seem like a pedestrian answer. Too easy, you say? There's got to be more to it than that. And there is. But if you start a college savings fund now, you'll be in far better shape to give your kids the education they deserve. In fact, if you're just starting to think about having kids, now isn't too soon to open a 529 college savings plan.

I live in Texas, and our 529 college savings plan allows us to contribute a maximum of $26,000 each year without incurring any gift-tax penalties (half that for single parents). My advice is to contribute as much as you can each year without going over this limit. You shouldn't put yourself in a financial hardship because of it, but it helps to get the ball rolling with large contributions so you'll motivate yourself to save for your kid's college fund.

With that said, it's a good idea to have a limit in mind when contributing to a 529 college savings plan. My kids, for example, will need to make do with a state university if they want their educations fully paid for. Education is important, but a pricy Ivy League education isn't necessary. You (and your kids) might have different priorities, so you'll have to adjust accordingly. 

Other Savings Options

In some cases, a college savings plan might not be appropriate for your circumstances. For example, if you're starting the saving process later in your child's life and you aren't sure if he or she will even want to attend a traditional university, this is probably not the best bet.

You can start a college savings fund without using a dedicated account. A regular savings account will work just fine, although the contributions won't earn as much as they would otherwise. Every family situation is different, and it's important not to discount options until you're sure what direction is best.

Retirement Versus College Savings

I've worked with the same financial adviser for several years now, and he occasionally cautions me against putting too much money into college savings plans at the expense of neglecting my retirement account. He makes the excellent point that, if I don't prepare for my retirement, I won't be in a position to help my kids out of any financial trouble they might find themselves in.

And this is the truth. It is difficult, especially in this economy, to find the funds to prepare both for retirement and for your kids' college plans. It's important to strike a balance between the two, while still managing to cover your current expenses. You can finance college, you can't finance retirement.

A Percentage Budget

My advice, therefore, is to create a budget based on a percentage of your income rather than on strict dollar amounts. My income, for example, varies from month to month because I'm self-employed. This is also the case for employees who earn money through tips or commissions, for example. This is why a percentage-based budget works so well.

You might allocate 15 percent of your total income each month to your kids' college savings plans, and another 15 percent to your retirement account. It might not be the same amount each month, but at least you're keeping your priorities in balance.