We started to save for college after our first child was born. Between the births of No. 2 and No. 3, the contributions stopped. I'm fuzzy on the details that went into that decision. Day care, which for a time cost more per month than tuition at the University of Minnesota, was surely a major factor.
Now the kids are in grade school. We must have hundreds of extra dollars laying around to dedicate to college, right? Um, no. Parents who held tightly to this belief throughout the toddler years know that the money formerly known as day-care tuition is sucked into a vortex of activity fees, grocery bills and other unexpected costs. (And yes, the parents of older kids silently cackled when you mentioned your coming windfall.)
As we researched middle schools for our daughter, it dawned on us that we'll be researching colleges in a half-dozen years.
Six years to save, six-figure expense
One of the challenges of saving for college is that it's one of many savings goals pressing upon families. Retirement, emergencies, a summer vacation — all require money to be prioritized and set aside. To put together an ideal college savings plan, we really should revisit our retirement savings to see if we're saving too much or too little.
But if we added that daunting task to the to-do list, I wonder how much more time would go by without any action at all? That's why I'm a big fan of money moderation. If we wait until the perfect conditions to create the perfect financial plan, odds are most of us wouldn't be saving for anything. While rules of thumb and best guesses aren't ideal, they're the sloppy reality of financial planning for average Americans busy working and raising kids.
For now, I'm taking comfort in the oft-shared advice from financial advisers to prioritize retirement savings over college savings. "When you wake up and you're 65 years old and haven't saved enough, there's not much you can do," said Andy Fishman, a certified financial planner with Affiance Financial in St. Louis Park. Personally, I'm taking this to mean that we should keep doing what we're doing with retirement savings and craft a college plan with what's left.
Cobbling it together for college
There are college savings calculators to estimate the many thousands you'll need. Be forewarned: The numbers they spit out are depressing. When I used the "World's Simplest College Calculator" at www.savingforcollege.com, it advised me to save nearly $1,000 a month — for just one kid's tuition.
The good news is that you don't need to go all-in with a way to pay. Savings, gifts from grandparents, scholarships, loans, your child's summer earnings and cash flow can add up to a manageable strategy.
529 plans
Years ago we opened a 529 college savings plan, which allows you to save after-tax money in a variety of investment options. The primary draw for this type of account is its tax benefits. Money grows free of tax and can be taken out tax-free for qualified college expenses. The investment options are plentiful, the fees aren't cumbersome and accounts can be opened with very little money. We invested $50 a month … until we didn't.
According to www.finaid.org, 34 states and the District of Columbia offer full or partial state income tax deductions for 529 plan contributions. Minnesota used to offer an incentive for lower-income families saving in 529 plans, but abandoned it years ago. The Minnesota 529 plan also didn't win a gold, silver or bronze medal in fund researcher Morningstar's 2014 529 plan rankings. With no home-state advantage, cast a wider net, searching for a plan with low fees, a variety of options, decent performance and an investment company name you trust.
Roth IRA
Another college savings option: The Roth IRA. Though designed for retirement savings, Roths allow contributions to be taken out tax-free at any time. If you want to take earnings out for education expenses, you won't pay the 10 percent penalty. I think of it as the little black dress of personal finance — it's so versatile. I also like the peace of mind knowing I have this resource at the ready for college, but if we luck out and our kids get full rides, we will be even better off for retirement. We'll max our Roths out each year before moving on to 529 plan contributions.
Cash flow
There's another overlooked resource to pay for college that most parents tap: Cash flow. By refinancing to a 15-year mortgage and resigning ourselves to the fact that our starter house is probably our forever house, we'll have ample cash on hand to cover college costs as they come. While some may argue we'll qualify for less financial aid and lose out on tax breaks by staying in a cheap house and paying it off, it's a strategy that helps me sleep at night.
Kara McGuire is a consumer strategist for CEB and author of "The Teen Money Manual." How are you planning for college costs? Tell kara@karamcguire.com.