Saving for college - when to stop it
Times are bad and getting worse. Consumer confidence is in the toilet. Inflation is rising, as is unemployment. A recession is likely either already in progress or is imminent. Home values continue to decline. Yet among all this, there’s one thing going up - the price of college. And there is a time for stopping the funding of college funds.
Across the US, millions of parents are having to make hard decisions about funding their children’s education and competing household financial priorities. I know. My wife and I are two of them.
Several months ago we made the decision to move to a lower cost of living area and have my wife stay home with our two children. It’s a decision we didn’t take lightly. It was fraught with financial decisions. One of the topics we had to tackle was whether, and how much, to continue funding of our kids’ college funds.
Even with a lower mortgage payment and work-related expenses (not the least of which is daycare!), the loss of a paycheck made for a hard look at our budget. Ultimately, we decided to continue funding retirement accounts and our small monthly contribution to a taxable account. Meanwhile, we made the decision to cut in half our contributions to the college funds. It wasn’t as easy a decision as it sounds, though.
It’s a decision that lots of people are having to make. And there is definitely a time to lower or stop the contributions to college funds. I won’t enumerate them because to do so would be presumptuous and because the situations where doing so is prudent are likely obvious to everyone.
I was struck, though, by this article on CNN/Money. The article itself is kind of the opposite of what I’m writing about here. It’s an encouragement to start saving for college early and often - standard stuff. But some of the passages seemed ridiculous to me (emphasis mine):
“New [529 college savings] accounts this year are down about 20%, according to T. Rowe Price, while existing customers are contributing 10% less to 529s [that’s us - our plan is with T. Rowe Price].
“It certainly appears as though it is the economy that’s impacting consumers,” says T. Rowe Price’s Tom Kazmierczak. “It’s very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage,” he says. “It really can be the wrong thing to do particularly if you’ve got younger children at home.”
Financial advisor Thomas Henske of Lenox Advisors recommends that clients who can afford it tuck away $10,000-$12,000 annually in an investment account for each child beginning at birth.”
Oh, ok. Save $10,000-$12,000 per year per child from age 0 for college. Ok. No problem. Is this guy for real?!? Seriously, if you save that kind of money for retirement you have to be in the top 10% of savers in the US.
And this guy Kazmierczak. Dude - news flash - paying the mortgage allows the kids to have a home to live in. I can’t think of another person who would choose college funds over paying the mortgage. “It’s very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage.” Damn right it’s easy, because that’s not even a decision. That’s automatic.
I’m an educated guy. I value education highly. But from a personal finance standpoint, saving for college is fairly far down the list. It’s well below paying the mortgage. There is most definitely a time to stop putting money into the college fund.
For many people, that time is now.
March 21st, 2008 at 5:55 pm
The T Rowe Price guy makes a living on getting people to fund 529 accounts. You have to take his advice with a proverbial grain of salt.
I’m with you. There are higher priorities than funding your kids’ college education. For example, it’s important to fund your own retirement so your kids won’t have to support you in your old age. I would rather rack up student loans than face the uncertainty of trying to fund my parents’ retirement at the same time I’m starting my own family.
My dad paid for his kids’ education through high school. My siblings and I were on our own after that. We all found a way to go to college, and several of us went on for a masters degree, PhD, or JD.
March 21st, 2008 at 9:40 pm
March 22nd, 2008 at 12:00 pm
March 22nd, 2008 at 3:10 pm
Just reading this. I’m missing the point about how much to contribute annually to my son’s college fund. I’m doing the numbers and am coming up with at least $10k per year necessary to save per year so he has enough for college. Why are you going after that advisor?
Do you expect him to give everyone an incorrect number so that they fall short of hitting the amount of money they’ll need to save? His giving viewers false expectations doesn’t seem like it would be right.
In all do respect, I think your off on this one.
March 23rd, 2008 at 1:29 pm
Very good post. For retirement, I think it would put you in the top 3% (or something much higher than the top 10%). Unless you are very wealthy (even just comparing yourself to others in the USA now) that level of college savings is a bit crazy. Given the current costs of college, looking at 100% funding with saving is unrealistic for most parent. Saving some to fund some expenses is a good goal I think.
March 24th, 2008 at 6:30 am
@ Peter - Just going by savingforcollege.com’s calculator, saving from ago 0 and using conservative numbers, they say it’s $7,224 per year for a private school ($25K/year). My point is that saving $10K per year for college is way, way unrealistic for almost all people. I think putting numbers like that out discourages people from saving or, at very least, makes them feel bad about what they are saving.
@ John - You make an excellent point. 100% funding isn’t necessary. I’m sure any kid would appreciate whatever help a parent could give.
March 24th, 2008 at 8:14 am
John and KMC,
Both good points. However, you can’t get on the advisor for stating the facts. This advisor might deal with a higher net worth client. If that’s his market, then maybe those numbers aren’t so far fetched.
KMC,
I was using a college cost of $35k. Again, if you were planning for a scenario where you wanted to fund the entire college education (which I do), and don’t want to bank on your kids not going to one of the more expensive schools (which I of course wouldn’t get lucky enough to have happen), than I believe those numbers to be correct. My goal isn’t to undersave for the event that my kid gets into Harvard and I am stressed trying to find the money for it.
I do understand the fear of it being a daunting undertaking. Trust me, I get that one.
March 24th, 2008 at 3:15 pm
Thanks for the post - I have two kids under 3, and both have 529 accounts but I’m wondering how much I need to put into those accounts. I want my kids to have an opportunity for a good education, but with the price of gas, rent, groceries, etc. skyrocketing, I really haven’t been able to put much into the accounts lately.
Thanks for making me feel better about it! I’m not a financial genious, but look to experts like you to help me make these decisions. Good post!
March 25th, 2008 at 9:16 pm
Even though I don’t have any kids, why not still contribute some money if not the full 12K, even 5K a year still adds up. Who knows? Your kid might want to wait a year or two before going to college, see what the real world is about.
I guess my question is where does it say that parents must meet the maximum contribution?
March 26th, 2008 at 1:26 am
Great article… I’m all for holding off on college savings to keep the roof over your head…
As we often say, “You can get a college loan… there are no retirement loans.”
Ken Clark, CFP
CollegeSavings.About.com
July 11th, 2008 at 8:17 am
I recently graduated from college, and i took out loans for a majority of my time in college. Looking back now I dont regret taking loans out to go to college, it’s a lot of money yes but I would never have wanted the financial burden of my school to go on my parents, it’s my choice to go to college so I should have to pay for it, it’s just like taking a trip in my opinion, it’s just 4 years worth.