You've paid off your debt, built an emergency fund and started saving for retirement.  So what's next, well, in conjunction with retirement you will want to start a college fund for your kids if they are under 18 and attending school.  As with saving for retirement, the more time you have before needing the money, means that you will not need to put back as much.  If your child is heading off to school this year and you don't have any money then you will need to come up with a plan to help them through school without any debt.  Education is extremely important but it is stupid to borrow money for education.

In other words, you will need to figure out a way to pay cash.  It can be done.  I paid cash for my master's degree.  I had to save $400 a month and it definitely put a crimp in our budget but every semester I was able to pay cash for the upcoming term.  Your child may need to get a part-time or full-time job to help pay for it.  They may try finding a company who does what your child wants to do.  See if the company will help pay for their degree while they work for the company.  Do whatever it takes to pay cash for school.  You may find that your child will need to attend a cheaper state school rather than an IVY league or big ten school.

I'm going to get on my soapbox for a second.  Personally, I have to tell you that most companies could care less about where your degree comes from.  Companies care about whether or not you can do the job you're hired for, including doing quality work and having good interpersonal skills.  You're looking for an education not a freaking pedigree.  I don't care what school you graduated from; if you can't produce results you will be fired.  To be certain, having a degree from a top tier school can help open doors… but at the end of the day, your skill set and what you bring to the table as a person will get you the job.

I'll get off my soapbox… So, how can you fund this.  There are several types of educational savings plans that can be used.  The two primary types are ESA's (Educational Savings Accounts) and 529 plans. Take a look at the following table to view the differences:*

Feature

ESA

529
Income Limitation Only available if your modified adjusted gross income is less than $110,000 for a single or $220,000 filing jointly No income restrictions.
Contribution limitation $2,000 per year per student No annual limit except if the money is gifted. Then the gift tax exclusion applies.  Most have a max account balance which can vary significantly.
Age limitations No contributions after 18 and cannot be used after age 30 None.
Tax Implications Contributions are after tax dollars, investment growth is tax free, and distributions are tax free as long as it meets the federal guidelines.  Distributions not meeting the guidelines are taxed. Withdrawals are tax free. Certain state plans may allow a state deduction on a portion of the contribution.
Rollover Can be transferred to other qualifying family members Can be transferred to other qualifying family members
Investment Control You select investment Depends on the plan.  Most plans are controlled by someone other than you.  There are a few will give you full control.

* Note:  Please consult with a licensed professional when setting up any investment account.  Make sure you understand what is happening to your money before you invest it.

Most people will want to start with the ESA, and may use a 529 to catch up a child who may be older and have fewer years left before they head off to college.  Generally speaking, stay away from pre-paid 529's and 529 plans which control the investment.  You should always be in control of your money.

Here are two quick examples showing how much money you set aside to pay for your child's education.  Both assume a 12% rate of return and a monthly investment of $166.67 dollars per month which totals to $2,000 per year.

1) Bart's parents started saving the day he was born.  When Bart heads to college in 18 years he will have about $127,000 available to pay for his education.

2) Francis' parents didn't start saving until she was 7.  She will have about $45,000 dollars for school.

Notice the significant difference in savings that 7 years makes.  Get your debt paid off, and then get your retirement and college savings going.  Help your kids go to college.  Do it now… You can't afford to wait!

I hope this information has helped you.  Please contact me with any questions you may have.