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When to Begin Investing for a Child’s Education

This article was written by in Investing. 14 comments.


I do not have any children.

I am, however, planning to have children at some point in the future. It is part of my long-term vision for my life, despite endless stories from co-workers who seem to have such a difficult time with their own. (These stories are always followed by a confession that they are glad they had children anyway, etc.)

A frequent Consumerism Commentary reader, someone close to me, read my articles about my plans for charitable contributions and offered some advice, paraphrased here.

I see from your web site that you are contributing a significant amount of your salary to charity. While laudable, have you thought clearly about this? One of the big mistakes I made was not to put money away for my children’s education. Not only did the loans end up being a burden on their Mother and I, but on them as well.

How may years have you been paying off college loans? Don’t you think that your life would be different now if you did not have to worry about college cost. If I were you, I would consider starting an education fund. There are tax benefits and other advantages and disadvantages to consider. Imagine the relief of not to having to worry about your eventual kid’s education.

I’ve always believed that parents should take steps to ensure that their children do not have to burden themselves with excessive work while attending high school and college in order to pay for their own education. While some “ownership” of their education might be a good thing, possibly motivating them to not waste their own money, I think that this is a time when students need to be full-time students without distractions, especially those causing unnecessary steps.

I want to be able to provide any educational opportunity for my future children. The most popular account type is the “529 Account,” named after the tax code that allowed its creation. The 529 Account would allow me to maintain control of the funds, even after the hypothetical children turn 18 or 21 years old. The investments would grow tax free. As long as the funds are withdrawn for qualified education expenses, I would avoid federal tax, possibly state tax, and any penalties.

The only downside is the chance that I don’t have children or my kids decide not to attend college. I would be able to withdraw the funds from the 529, but I will owe tax on the earnings and a penalty fee. The other option is to name another family member as the beneficiary.

The 529 appears to be the best choice for investing for education, but I’d like to have a more definitive plan on the issue of having children, particularly pertaining to the timing. (I would say right here that I should probably be careful what I ask for.) If anyone else asked me, I would say it’s never too soon to start investing for the future education of children who are merely hypothetical, but a potential 10% federal penalty tax does not seem inviting.

To the reader’s question about investing for education versus charitable giving, I would like to do both. I guess I should work harder now, while I have fewer “life” responsibilities, to try to build up more income to cover as many bases as possible. Even if I don’t open a 529 Account right away, I can designate a certain amount of savings each month towards this goal.

Photo credit: CarbonNYC

Updated January 16, 2010 and originally published January 1, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 7 comments… read them below or add one }

avatar thomas

I’ve been around every type of college student in my life. Some types include – 100% loan, 100% parents, and work to pay. it’s really tough based on the types I have met to figure out what would be best for my children. It’s always best to at least investigate the opportunities for helping your kids and not start them off in a financial hole.

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avatar Yana

I agree with your friend that saving for your potential children is more important than charitable giving. And not just saving for education. You never know what will come up, especially if you have children.

I raised a daughter. It wasn’t a lot of fun. When she was moving out, she thought we ought to go to the animal shelter so that I could adopt a dog, lest I get “empty nest syndrome”. LOL I never got the syndrome, but I’m really glad I adopted the dog! When you have children, you learn things you couldn’t have known before. You wouldn’t believe the things unless you experienced them yourself. That may be one of the greatest values of being a parent. So, I’ll go along with what you’ve heard and say that I’m glad I had a child, but I only had one and would not have more. I prefer parenting other species :P

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avatar Emily

I am not even engaged and recently out of college, I am already nervous about paying for college for my children in the future!! My parents started a college fund when I was born and it compounded over the years, and it was just enough money for me to go to my state school and not have to take out any loans. I was fortunate enough to graduate with zero debt. But had I wanted to go to a private and/or out-of-state school, it wouldn’t have been nearly enough. I have been reading that college education costs are only going to go up and up, and it may actually become unaffordable for many who could once pull it off. I don’t want to cripple my family with college debt or make my child stuck with awful debt for many years after school, so I definitely plan on making saving for college a huge priority, definitely over charity. I probably won’t start saving for this until I get pregnant, but once I do, I am getting on top of that so fast. A college education is now necessary but it’s only going to get costlier.

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avatar Lobo83

Paying for your children’s education is half the battle. You need to ensure that your children will 1) want to go to college and 2) actually get a degree. For item 1 you need to spend your valuable time with them as they grow up. This will ensure they know you care about them and you will let them understand the impotance of education – including college. Trust me, this is harder than saving money. As for item 2 I will share with my children the costs. I will pick up tuition along with room and board and they will have to pick up books, clothing, transportation and such. This will force them to invest in their education and hopefully finish their degree. It would be nice to set up an automatic savings program for college costs – but it is not critical. It is still affordable tol pay as you go for state schools. From what I have experienced with graduates from private colleges, they are for the most part not worth the cost of tuition. After all why pay $50,000 a year for a mediocre eduation?

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avatar Tagi

Flexo – It certainly can’t hurt to start stashing some money away in a 529 for future children. This is something I now wish that we had done before our son was born. Now, with $1250/mo going towards daycare it makes saving for college very difficult.

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avatar The Happy Rock

I tend to fall in the parents don’t need to pay for everything. Working while in college is a good thing IMO. I know that having to pay for all of my college was great for me, since I had to really decide if I wanted to be there and if it was worth. I graduated with 25k in debt and it along with my wife’s $22k was gone in 5 years. Invaluable life lessons IMO.

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avatar Lamar

DINK for many of the usual reasons. but I did set up an annual college scholarship at my old high school. I feel I get more bang for my buck with this shotgun approach.

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