Monday, June 2, 2014

College and loans

College is something a parent has to start thinking about the moment the baby is brought home from the hospital. In many cases, college savings are done haphazardly, not in time, and in the least efficient ways possible. In this instance, it is better for the to-be parent to slow down, get a plan, and get moving.

First, timing is everything. If you don’t have children yet, then don’t start putting together a savings account for your would-be child to go to college. Don’t be an over-saver. It is better to use that money for retirement, or paying off your house. When and if you do decide to have children, you can begin planning. When your infant comes home, you will have choices regarding the placement of your money. 529s, ESAs, government bonds, and mutual funds (of generic kind) are the common places for college savings. The best place to save is the ESA, or the Education Savings Account. The others are fine, but the ESA, if you qualify, is the most effective way to protect your money.

From what are you protecting it? Taxes. The government would love to take all your hard-earned money, but you have a kid who needs an education. So, shelter your money in this ESA. It allows you to put up to 2,000 dollars a year. If you begin saving at age 0, then by 18 you will have put 36,000 dollars in the bank of just your own money. Say it grows at 4%, by the time you need the money, it could be worth way over a million dollars. That, of course, will be more than enough money to cover any type of schooling you could imagine. You may not put in 2,000 a year, especially if you are low income, but I suggest you take advantage of this opportunity to see amazing growth in your money for your child.

This means you cannot be haphazard about the growth of your money. If you are not regular putting money in the bank, then you will fail at maximizing your potential return on investment. Build college saving into your budget. If you have an emergency fund, a good income, and a savvy saver in the house, then you will be fine. If you don’t have a budget, then you will find yourself forgetting to deposit the check. You might use that money for emergencies. You might even spend it on needless and frivolous things.

Money is extremely important for your children. It will provide care for them as they grow, it will give them food and shelter, and it will be the source of their ability to get a higher education, should they seek it.

What is the alternative for funding college? Loans. These evil agreements are not good for anybody involved. If your child has to take out loans to go to college, you will end up co-signing with them. Then, your adult child will forget to pay the bill, and you will be stuck with the credit ding and the tab. Be smart and save now. If it’s too late and you’re already sending a kid off to college, ask them to take on extra jobs. Limit the amount of debt you need to go to school, and you will be set up to win once education is completed.

The last thing you want, as a graduate, is to be using your hard-earned income to repay loans for ten to twenty years.

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