College Funds
When we got married, my wife and I had about $60,000 total in undergraduate student loan debt. This was a huge burden, and about $750/month out of my low, first-year-teacher pay. If you can, don't let your kids bear this burden. Just like investing in a Roth IRA or 403(b), you can invest for college using the same DIY principles.
Dave Ramsey recommends saving for college in "Baby Step 5" - after all debts are paid off, after you have funded a 3-6 month emergency fund, and after you have started your retirement investing. I agree with him as you can borrow for college, but you cannot borrow for retirement!
Encourage your kids to earn as many scholarships as possible (they could apply for a thousand scholarships the summer of their Junior to Senior year and get a few that could be enough to pay for a large portion of their college education!), attend an in-state public university, and perhaps take their first few Gen-ed courses at the local community college to save money. The rest can be paid for out of pocket, from your kid working while in school and in the summer months, and also from the college fund.
College savings can come in several different forms:
1) Series I and EE Savings Bonds
2) Coverdell ESA ("Education IRA")
3) State 529 plan
4) UTMA/UGMA
Savings Bonds are the old way of saving and not a good choice. They create tax problems and don't make enough compared to other options. The Coverdell Educational Savings Account (ESA) works much like a Roth IRA in that you can save after-tax dollars, allow the money to grow tax-deferred, and withdraw for qualified educational expenses tax free. ESA's have a $2,000 per year contribution limit, so there are some companies like Vanguard that no longer offer an ESA account because they would be too expensive and would raise their costs. The ESA could be a good place for your first $2,000 of annual college savings.
Each state has its own 529 plan, and you do not have to be a resident of that state to use its particular plan. However, Michigan does allow an income tax deduction for its residents contributing to a Michigan 529 plan each year up to $10,000 for Married Filing Jointly. A 529 works much like a Roth IRA in that the money is invested after-tax (although the first $10,000 can be deducted from MI state taxes), grows tax-deferred, and can be used tax FREE for qualified educational expenses. Michigan's 529 has two choices: pre-paid tution and mutual funds. Pre-paid tuition will only make the same amount that tuition goes up each year, so I'd rather use the mutual fund account. There are several styles of funds in the 529 - There are some that are Aggressive, Moderate and Conservative and change as the child ages. I like the Balanced Fund that has a fixed 60/40 allocation. Each fund in the MI 529 plan has TIAA Cref index funds at their core and are good funds. Anyone can contribute money in that child's name, but a particular child is limited to $235,000 of total contributions.
UTMA and UGMA are for those with high incomes that do not qualify for the other college savings plans. Look into this if it will be necessary for your situation.
Dave Ramsey recommends saving for college in "Baby Step 5" - after all debts are paid off, after you have funded a 3-6 month emergency fund, and after you have started your retirement investing. I agree with him as you can borrow for college, but you cannot borrow for retirement!
Encourage your kids to earn as many scholarships as possible (they could apply for a thousand scholarships the summer of their Junior to Senior year and get a few that could be enough to pay for a large portion of their college education!), attend an in-state public university, and perhaps take their first few Gen-ed courses at the local community college to save money. The rest can be paid for out of pocket, from your kid working while in school and in the summer months, and also from the college fund.
College savings can come in several different forms:
1) Series I and EE Savings Bonds
2) Coverdell ESA ("Education IRA")
3) State 529 plan
4) UTMA/UGMA
Savings Bonds are the old way of saving and not a good choice. They create tax problems and don't make enough compared to other options. The Coverdell Educational Savings Account (ESA) works much like a Roth IRA in that you can save after-tax dollars, allow the money to grow tax-deferred, and withdraw for qualified educational expenses tax free. ESA's have a $2,000 per year contribution limit, so there are some companies like Vanguard that no longer offer an ESA account because they would be too expensive and would raise their costs. The ESA could be a good place for your first $2,000 of annual college savings.
Each state has its own 529 plan, and you do not have to be a resident of that state to use its particular plan. However, Michigan does allow an income tax deduction for its residents contributing to a Michigan 529 plan each year up to $10,000 for Married Filing Jointly. A 529 works much like a Roth IRA in that the money is invested after-tax (although the first $10,000 can be deducted from MI state taxes), grows tax-deferred, and can be used tax FREE for qualified educational expenses. Michigan's 529 has two choices: pre-paid tution and mutual funds. Pre-paid tuition will only make the same amount that tuition goes up each year, so I'd rather use the mutual fund account. There are several styles of funds in the 529 - There are some that are Aggressive, Moderate and Conservative and change as the child ages. I like the Balanced Fund that has a fixed 60/40 allocation. Each fund in the MI 529 plan has TIAA Cref index funds at their core and are good funds. Anyone can contribute money in that child's name, but a particular child is limited to $235,000 of total contributions.
UTMA and UGMA are for those with high incomes that do not qualify for the other college savings plans. Look into this if it will be necessary for your situation.