For many, it is not a cut and dry decision on whether or not parents should contribute toward paying for their children’s college. This is an interesting topic to consider. Many parents will pay hundreds of dollars to put their children into dance, soccer, go on expensive vacations, but fail to contribute ANYTHING toward their children’s college fund. In many ways, this is doing a large disservice to your kids, under the guise of making children independent by paying for college on their own. In reality, this just leads the next generation to take out large student loans that could take them many years to pay back). As many financial goals tend to be, college is one of those things that is a long-term goal that is not realized until many years after you begin saving for it. It is the opposite of the instant gratification mindset that is so prevalent in our society today.
As you can see, I am very bias in this area, and strongly believe that parents should consider contributing something, anything, toward their kids college if they are able. I don’t believe in being an enabler or giving handouts… but I also don’t believe in being a disabler. By investing early for your children’s college, the investment has plenty of time to mature and benefit from compound interest. But choosing to delay or not invest in a college fund, there is no opportunity for the investment to grow over time, and it leaves little options left to the student, other than to get a loan, or hope for a scholarship.
Assuming that the goal is to contribute to your children’s college fund… how much should you contribute? What if you have more than one kid? How much should you contribute to each child’s fund? Where should you put the money?
Fortunately, most states offer a very nice option for putting money toward college. It is the 529 plan. This plan allows family members (parents, grandparents, etc.) to contribute tax-free money toward college. As long as the beneficiary uses the money toward college-related expenses, it is never taxed. But what if my child gets a scholarship? Then the money equal to the scholarship amount can be withdrawn tax-free from the account and used for anything. What if my child doesn’t go to college? You can re-assign the money to another beneficiary (another child, etc.) without any penalty. Of course, money contributed toward a 529 will also be invested and given the opportunity to grow with the market.
Recently, we decided to re-focus our efforts on saving for college. We have 5 children, the oldest just having turned 11. Currently, each child has ~4,100 in their college 529 plan. How much should I disproportionally contribute toward an older child, since their fund has less time to compound? I put together a simple formula to determine how much each child should get, based on how far behind they are.
The goal of the formula is to contribute more toward the college fund of children that are further behind than they should be. First, I determined how much I have saved already for each child and put that in the “Actual” column next to the child’s name. Second, I determined how much the child “should” have for their age, according to known calculations (see table below). Third, I subtracted how much they should have minus how much they actually have, to determine how much each child is behind by. Totaling how much each child was behind by gave a total of $31,935 for all children! Hard to believe that we are THAT far behind in paying for our children’s college. But don’t forget the numbers are all relative, and the actual amount we are behind by is not that important, since we will be dealing with fractions from here on out. Fourth, I divided the amount each child was behind by, by the total of all children, to give a fraction for each child. For example, the 11-year-old in this example is behind by ~14k, which is 43% of the total deficit of all children combined (~32k). Fifth, I multiplied the fraction each child was behind by the total amount I choose to budget for college in a given month. Here, I am choosing to budget $750 total per month for all children toward college. This means that the eldest would get 0.43 * $750 = $323.55 / month for college. Doing this across the board for all children, gives a total monthly college contribution fo $750, which is exactly what we were targeting. It is really not too complicated once you enter in your own numbers. But the overall outcome, is that eventually, all children will be behind by the same amount for their age, and can get caught up, if desired, by continuing to increase the total contribution amount. For reference, here is a nice chart of how much you should have in a college fund, depending on the type of school you are looking to send your child to:
Again, keep in mind, that the exact amounts above are not the important part. These are only used to help you disproportionally contribute the right amount to each of your child by considering: a) how far behind is your child’s fund, and b) how much per month are you willing and able to contribute toward college.
Using the above strategy, we now have a plan to take care of kids’ college, and can begin to focus on knocking out that mortgage as part of baby step 6!