Baby Step 5- Saving for kids' college (part 2)

My youngest son scored a 25 on his ACT. He met the academic requirements for a full ride scholarship, but not the score requirement of 30 on his ACT. I had to use my super Mom persuasive powers to convince him to take a $100 prep class at UAH. He groaned and complained the entire two weeks, but I give him credit, he went and he paid attention. He increased his ACT score and obtained the full ride (minus room and board) scholarship to UAH. He simply stayed home to reduce costs or the need for a student loan.

My oldest son, did decently in high school. He didn’t fail, he passed his courses. He wasn’t as academically proficient as his siblings, (he’s just as smart as his siblings) so we were not surprised when he suggested that he wanted to enter the military for the GI Bill in order to obtain his education. This is an option that you can also explore with your kids. My son’s advice is to stick to your intentions when you’re in the military. It’s very easy to get side tracked with promotions/marriage/locations, but if you’re going to the military for school; do what you have to and go to college.

Schwab Moneywise says, a way to fund college is with an Educational Savings Account also known as the Education IRA. It grows tax free when you intend to use it for higher education. You essentially have to use the money for qualified college education expenses like books, tuition, supplies etc. in order to withdraw the money tax free. Only couples with adjusted gross income of less than $220,000 can open an ESA or $110,000 for single people. You can only contribute $2,000 a year until the person’s 18th birthday. All funds must be liquidated by age 30. The good thing is that you can roll over the balance to an ESA for another designated beneficiary to avoid certain taxes and penalties.

Another type of savings’ plan for education is the 529 plan. Anyone can open one of these accounts. The good thing is that anyone can contribute to the account as well. The 529 has no income limits and withdrawals can be used to pay for certain educational expenses at eligible U.S. post-secondary institutions or apprenticeships programs. $10,000 is the limit on a withdrawal with the intention of repaying a student loan for the beneficiary and another $10,000 can be used to repay student loans for the beneficiary’s siblings. The limits for contribution are $75,000 for a single person and $150,000 for a couple without triggering the gift tax. The only thing is if you contribute this much it has to be the only contribution that you make to the beneficiary for five years. 529 are state plan’s so they will vary from state to state. There are several types of 529 plans. You want to avoid the “life phase” plan because the administrator can control your money and shift it to conservative investments as your child ages. You also want to avoid the “fixed portfolio” plan because it invests in a group of mutual funds that locks you in to them until you need the money. If you decide to use a 529 plan the best type is the “flexible” plan. This allows you to move your money around with mutual funds.

Whatever you plan to use, the best way to approach college for your children is having a plan. The earlier you start the better. Once you’ve completed the first four Baby Steps, I am told that this Baby Step (5) will be much easier to accomplish.