Skip to content

The Importance of Saving For College (IE: Paying for college with NO DEBT)

Today we’ll look at Baby Step #5: Save for your children’s college funds

So, at this point, you would have paid off all of your debt except for your home. Awesome, right? Absolutely! I’m willing to bet that at least some chunk of that debt was student loans. Why am I willing to put my money on that? Because of a bit of research and my own experience. As of 2018, the average student has a debt of $27,975. Ouch. Heck, I know people who have north of $100,000, and several who are well north of the average.

How are you supposed to overcome such a crippling debt as that? The long-term political and economic implications of SO MANY young people carrying such a high amount of debt is staggering, but that’s a topic for another day. And, just for clarification, I don’t think the solution is “Free” college for everyone. What we’re here to focus on is how to get out from under that debt using the Baby Steps, and now how to set your YOUR children to avoid debt to pay for school so that they don’t have to go through what you’ve gone through, right?

What are my options?

Save For College Using a 529 College Savings Plan – This is the most common way that people save for their children’s education. People can put up to $14,000 per year into these accounts and can even put $70,000 at one time into the fund as a 5 year lump sum contribution. Obviously, that would be rare, but sometimes an inheritance comes up, or a grandparent wants to make a large contribution for a child out of their own savings. It can happen.

  • 529 Plans are essentially retirement accounts for college. I recommend investing in them the same way that you’d build a portfolio for retirement, as we discussed yesterday. Equal parts into the 4 categories. As with retirement, having a professional help you through them is key.
  • There are alternative ways to save for college, like Coverdell ESA, but generally I recommend the 529. The Coverdell’s advantage is that it can be used for non-college educational expenses. It’s downfall is that there are limits of $2,000 per student, per account. Multiple accounts can be set up, but that can be messy.
  • There are other alternatives such as life insurance and ROTH IRAs, but again I do not recommend those for the average bear.
  • What about penalties? If you don’t use the money for college expenses, what happens? Well, you have to pay income taxes and a 10% penalty on whatever interest you earn. Luckily, there are ways to get around that which I’ll talk about below.

Sometimes the kids are too old (Too late to start), or you just can’t afford it. Then what? 

Luckily there are plenty of ways to help supplement college or even pay for it all together without savings. I recommend that EVERYONE use the strategies below, regardless of whether they have a funded 529 plan. Why? Because you can get that money out of the 529 penalty and tax free in many cases.


  • If your child happens to get scholarships, you are able to take that amount out of the 529 account and put it back in your pocket. Let’s say the scholarship is for $10,000. You’re able to take that amount out, and only pay income taxes on it. If your top bracket is 22%, and the money represents the interest earned on the account, that means you’ll only have to pay $2,200 in taxes. The rest is yours. If that money is principal (The money that you put in before interest), you pay NO taxes or penalties.
  • If you don’t have a 529 plan because of one of the reasons above, scholarships are your friend. My recommendation is this: Make your kid’s after school job applying for scholarships. Instead of working at McDonald’s for minimum wage, have them spend that 10-20 hours per week applying for scholarships. Why is that a good idea? Here’s an example. I have a client who had their child literally clock in and out every week day for 2-3 hours per day. That child applied for around 1,000 scholarships over a two year period. They got rejected for 980 scholarships, but the one’s that they were accepted for paid $40k per year in schooling. Read that again. $40k. Would you rather they work at a fast food joint for $10k or less per year, or essentially make $160,000 to put toward a four year degree?

Start Out At Community College

  • The average cost of community college is $4,871 per year.  Private college averages $15,450 per year, which is LOW for private schools. That’s over $10,000 difference per year, at minimum. If your child can go to one of these and knock out all of their liberal studies courses, then transfer those credits to a university and still get the same degree, why wouldn’t you try and steer them down that path? No-brainer!

We Needs Trades-people

I hope that this was an eye-opening read for you. When I go over this stuff with my clients, most of the time they’ve never considered these points. It’s always a good exercise to do your own research and be inquisitive because, in situations like college education, it can really pay off.

Tomorrow, we’ll be covering Baby Step #6. I hope to see you there!


Do you have a question about higher education funding? Comment below!

Are you excited about starting your journey to financial independence? Share this post with the people you care about!

Published inUncategorized

Be First to Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Skip to toolbar