Q: I am in my forties with two daughters-one is 16, and the other is eight. I have credit card debt and a mortgage to pay. I would like to know how I would start investing now for my girls to go to college.
–A visitor, Philadelphia, PA
A: You are so right to be thinking about saving for your children’s college education. Studies show that the typical college graduate leaves school with close to $20,000 in student loan debt. And many more graduates leave with much more than that.
But, it doesn’t appear you have the funds to save, just yet. You need to first get rid of that credit card debt. I don’t know how much you have, but any amount you aren’t paying off every month is too much. You should also have at least three months living expenses saved up. And by that I mean you should have enough money in an emergency fund to cover all your expenses—mortgage, car payment, food, utilities, cable, etc.—for three months. That way, if you lose your job or become ill, you will have enough to live off.
I also hope you are saving for your retirement. If not, that actually should come first before you begin saving for college for your children.
Once you become free of that credit card debt, and you’re saving for your retirement, I would recommend a 529 college savings plan for the younger child. When you invest in a 529 savings plan, you put in after-tax dollars, but your money grows tax-free, and distributions (the money you take out later) are free from federal taxes, as long as the money is used to pay for qualified higher education expenses.
Every state and the District of Columbia offers at least one 529 plan. But, you are not limited to investing in your own state plan. Another state may offer a plan that performs better and has lower fees. However, you still should check out your state plan, especially if the state offers a tax deduction for your contribution.
In your case, I see you are from Pennsylvania. Lucky you, because the maximum annual state income tax deduction is $12,000 per Pennsylvania taxpayer per beneficiary and $24,000 for married couples filing jointly, provided each spouse has taxable income of $12,000. Click here for more information about Pennsylvania’s plan.
This type of 529 plan operates much the way 401(k) retirement savings plans do. States, like employers, arrange for an investment company to set up and manage their 529 savings plans.
I should also note your child does not have to attend a school in the state where the plan is set up.
Each 529 plan can have a number of investment options. The money you invest is always yours. However, if you withdraw the money, and it’s not used for qualified higher education costs, your earnings may be subject to taxation and a 10% penalty.
I’m going to refer you to some resources for more information on 529 plans. The first is “A Guide to Understanding 529 Plans,” which you can download by clicking here (PDF).
The second source is Savingforcollege.com. This site offers a wealth of information about 529 plans.
Saving now for your 16-year-old will be more difficult. Because investing in a 529 plan should be long term, and your child will probably be entering college in less than three years, I’m not so sure you want to put any money you have at risk in such a short period of time. Considering the see-sawing we’ve been seeing in the stock market lately, you don’t have a lot of time or money to risk, where the older child is concerned.
That means thinking of other ways to cut cost for college. If your household income is relatively low, your child is likely to qualify for a lot of scholarships. For example, many Ivy League schools are offering full scholarships to families with low to moderate incomes. Start looking now to see what may be available.
Also consider community colleges. Your child could get all the basic course requirements out of the way and then transfer to a four-year university. Or he or she could go to a state school and commute from home to save money.
The point is there are many ways your child can still go to college and not break the bank. Good luck!