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College Costs Are Rising: Save Now With an Education Savings Account (ESA)
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Guest Poster |
January 29th, 2009 |
Category:
All Things Money |
6 comments
The following is a guest post written by Amanda of TheMomCrowd.com. The Mom Crowd is an encouraging, informative, and inspiring parenting blog written by four moms. To read more of Amanda’s work, subscribe to Mom Crowd’s RSS feed.
College Costs Are Rising: Save Now With an Education Savings Account (ESA)
Our 1-year-old daughter may not know it yet, but my husband and I expect her to go to college. We hang our degrees on our wall to encourage her and her future siblings to go on this path. While a college degree may not be the key to success in every career, we value the practical and intrinsic rewards of obtaining a four-year degree.
We want to help our children avoid college loans and give them tools to help them pay for college. We are still paying off my husband’s $28,000 college loan that he accrued in three years of college over 15 years ago. While our student loan will be paid off soon, we don’t want our kids to make the same mistake.
According to the College Cost Calculator on AmericanFunds.com, it will cost $168,395 to send our daughter to The University of Texas at Austin starting in 2026 for four years. This calculation is based on a 5% inflation rate. $168,395 is for an in-state, state college! Not a private university or an out-of-state school. We certainly don’t have that kind of money today. We plan on curbing the cost of college by starting an Education Savings Account (ESA) for each of our children.
What is an ESA?
An Education Savings Account or ESA is a special account that invests your money in a good growth stock mutual fund while it grows tax-free. It is sometimes called an Education IRA. You can invest up to $2,000 a year of after-tax dollars, if you earn under $200,000 a year. Financial guru, Dave Ramsey, explains that if you start investing just $166.67 per month ($2,000/year) from your child’s birth to age 18 through an ESA averaging 12%, you would have $126,000 tax-free.
It will take some planning and determination to invest $2,000 a year for each child. A $166 monthly payment is not the easiest line item to work into a monthly budget, especially when other items are screaming to be prioritized first. It will help when our debt is paid off and we can put what we would spend on a car payment or credit card payment into an ESA. Also, any bonuses, extra money, or big monetary birthday gifts will be put into this account.
A good financial adviser can easily set up an ESA for you and help you assess what level of risk you want to take depending on the age of your child. The market is low now, but it won’t stay low over the next 18 years. You have to think long term and don’t jump off the roller coaster. You can check out Dave Ramsey’s Endorsed Local Providers to find an honest financial advisor in your area.
We don’t plan on counting on scholarships or government help to pay for college. If our child is lucky enough to get a full ride, the ESA will still cover other college costs such as living expenses, books, and meals. Also, the ESA is transferable to another sibling for the purpose of higher education until they are 30 years old. You can even change beneficiaries once a year.
With careful financial planning through an ESA we can help our child create a great future for themselves by helping them stay out of debt and create a great foundation for their career at college.
Have you created an ESA for your child? Do you plan on helping pay for your child’s college education? Are you overwhelmed with the rising costs of college?
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Photo by Sara Haj-Hassan.
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