"Why didn’t parents SAVE for their children’s education?"
You gotta play the hand you're dealt. For most folks, between providing a decent living, paying taxes, saving for retirement, there already isn't enough money. Saving $200K to go to a private university, or even $100K for many public schools per child isn't in the cards.
I own my own business and am entirely responsible for: Both sides of payroll taxes; my own health insurance; my own health savings account contributions; my own disability and life insurance; my own retirement savings. For many years, I maxed out my retirement account contributions at 15% per year of my income. Between that and all the payroll and income taxes, health insurance premiums (which only became fully-deductible for the self-employed in the late 1990s), life insurance, disability insurance, etc., well, I was able to save a few bucks on the side, buy a nice house, keep a couple of decent cars in the garage, and send my kids to Catholic high school (we homeschooled through 8th grade, so we gave up hundreds of thousands of dollars in second income over the course of 10 years - best investment we ever made).
I had to prioritize my savings. After accumulating a little cash as a cushion, I first funded my retirement accounts. Did my best to max them out.
After that, I tried to save to make sure that we've always had a cash cushion, especially for tough times.
I never saved for my kids' college educations, and have nowhere near enough money in our general savings for them.
But I do have decent retirement account savings, and with a little luck, and recovery from the Obamadepression, my wife and I will retire comfortably.
From my own perspective, one should never put a dollar into a formal, tax-deferred college account or fund.
The key to what schools will charge you is not the official rate of tuition, room, board, etc., but your Estimated Family Contribution (EFC). Most schools try to charge a family no more than the EFC, or at least to try to get near to it. Some schools provide 100% of demonstrated need, meaning, you're only on the hook for your EFC. Some schools provide a smaller percentage of demonstrated need. The more prestigious a school, generally, the more generous the need-based aid.
So, the goal should be to minimize one’s EFC.
Each school has its own formula for EFC, but they all derive from the federal guidelines, which are based on data submitted through the FAFSA.
Your EFC will comprise several parts. First: A big chunk of your annual income. The more income you have, the bigger the chunk they look for. At the top end of the financial aid range, some schools are essentially adding to your EFC at a marginal rate of 35% - 40% of marginal dollars. Ouch. Next, approximately 5% of your general savings. But generally, unless you're well into seven figures, NOTHING of your retirement accounts. Next, 25% of formal, tax-deferred college accounts, and 25% of your kid's assets.
So, maxing out retirement accounts minimizes EFC.
Putting money into formal college savings accounts MAXIMIZES EFC.
Putting money into regular savings accounts or financial investments ahead of maxing out retirement accounts increases EFC.
No matter what you've saved or haven't saved, whether in college-specific accounts, retirement accounts, or the passbook account at your local bank, your EFC will be large enough that you will likely not have enough money, while your kids are in college, to continue to fund your retirement accounts. Unless you're rich or you live very frugally.
Thus, maxing out your retirement accounts will reduce your EFC, but it also makes sure that you will have had some chance to fund a decent retirement before your kids get to college.
I followed my own advice. I make a comfortable, upper middle class living. I have money in the bank as a cushion. I've done my best to max out retirement contributions, and have a modest retirement fund (more modest than it was a few years ago, LOL, but I'm hopeful it will recover before I retire).
I have no college-specific savings.
I don't have anywhere near enough money in savings to pay for my two sons to go to college without loans, except maybe at the local community college.
But my son applied to college last year (he's a freshman at his chosen school this year), and we filled out the FAFSA and all the supplemental forms asked for by each school. He was accepted to most of his schools, and received offers of financial aid or merit scholarships at all of them.
Because our EFC includes no contributions from savings, and only contributions from current income, and because my son chose the school with the most generous need-based financial aid package (although he turned down a full merit-based package at another school), I should be able to pay for my son's college education out of my current income, without any loans. And although I won't be contributing to my retirement accounts for some years (my other son is a high school junior, so he's up next), because I focused on saving there through my 30s and 40s, I should be okay.
If you have kids whom you think will eventually go off to college, you should fund retirement savings first, general savings next, college-account savings never.
sitetest
Thank you very much for that detailed explanation. I ran my own company until becoming an employee at a larger company recently. I maxed my SEP IRA then and I never opened a college saving account thinking there was hook.
My oldest is going to be a high school sophomore. I’m starting to look in earnest at how to approach college financing. Your post has given me a great leap forward!
This is what’s wrong in our country right now.
You can’t afford a 200K private school. You’re not alone, most can’t. So, here’s what you do. When your child starts visiting colleges, in that summer before their junior year, or during their junior year of high school, don’t visit the private schools. Visit the schools that are affordable in your own situation. Tell your child to *gasp* work during college, attend part time, or get a job after high school to save a little for college. There are just so many ways to have your children attend college. There’s also absolutely nothing wrong with community colleges.
If your child received a full ride at a school and didn’t take it, well, you’re in great shape. Attending college has become a political football with the democrats, telling people that they should attend the most prestigious university out there and don’t worry about those darned student loans, Obama will forgive them!
I just think that as parents, it’s up to US to teach our children responsibility. I still have little sympathy for parents who claim to have no savings for their children’s education, yet are running around with the latest iphone, acrylic nails and brand new cars in the driveway. It’s just priorities, but I do fear this country has lost its way.