After I made four attempts to attend college, got no degree, and accumulated thousands of dollars of student loan debt, I was introduced to an investment tool that will help my children avoid following in my footsteps.
The first time I attempted to go to college was immediately after high school. The second time was right after the birth of my second child. The third time was after I got married, and the last time was right after my divorce. The last time I tried to go back to college, I realized how expensive it was for me now that I was older with more financial responsibilities and little to no savings or options to pay for school other than taking on more debt.
I also realized that each time I had to drop out of college, it was 100% related to the cost. Getting a degree was entirely out of my budget.
After my divorce, I had to exhaust every savings account I owned to get my finances back on track. I was one emergency away from completely derailing my finances, and I could not afford my day-to-day living, let alone spare any money for school.
My hopes of returning to school were shattered because of the financial impact of my divorce — and I don’t want my sons to experience that feeling.
Using 529 Plans as a Way to Pay for College
My income hadn’t increased much since the divorce, and I needed to figure out a way to use a small amount of money to secure my sons’ educational needs without taking away from our day-to-day financial needs.
That’s when I learned about investing in small increments and the power of compound interest.
My little sister, who has always been way more financially savvy than me, sent me a text asking if I had a 529 college savings plan for my children. I had no idea what she was talking about, and I was instantly uncomfortable with the thought of adding any new expenses to my budget, even for a good purpose.
A 529 plan is a tax-advantaged investment account. While your money is in the account, no taxes will be due on the earnings your investments make, and if you choose to take money out for a qualified educational expense, the withdrawals will be tax-free. Parents can earn more on their invested money than they would if it were sitting in a regular savings account.
The earlier you start investing for significant expenses like college, the better. It reduces the likelihood that you’ll need student loans.
You Don’t Need A Lot to Start
When you’re investing on behalf of your kids, you have two big advantages: compound interest and time. I did not have much money to invest each month, but with time and compound interest on my side, what little I could spare became beneficial. Most states have a minimum contribution of $25 or less to start a college savings plan. (See here for a full list of 529 plan options in every state.)
At the start of my plan, I lived in Missouri. With no minimum required, I started investing for my sons with just $20 per month before switching to $250 per month a year later. Anyone who wants to save money for their child’s educational needs can support them using a 529 plan. As a single parent, I used every opportunity to fund my children’s education by asking family and friends to donate or send them “gifts” for their college education. Most 529 plans have a gifting service that allows you to ask for financial support, and this was the method I often used in replacing birthday and Christmas gifts from family and friends.
Flexible Use of Funds
Think of a 529 plan like a 401(k) or Roth IRA, except it’s for educational purposes instead of retirement. Saving for my children’s education was a priority because of the many obstacles I ran into while trying to further my education, which would have helped me advance in my career.
When choosing a 529 plan, you are not limited to only using the investments for college tuition. After a recent change in the tax plan, parents were given more flexibility and control over how the 529 plan could be used. We can now use up to $10,000 of our 529 accounts toward K-12 tuition. In 2021, my children and I relocated to a new city, and we found an amazing private school in our area with a total monthly tuition of $2,223. This tuition initially would’ve increased my monthly expenses significantly. Still, because I’d started the 529 plans years ago, I used a part of the funds to pay for more than 50% of their tuition costs, dropping my monthly out-of-pocket payment to less than $1,000 per month.
If You Don’t Use It, You Don’t Lose It
I want both of my children to pursue higher education, but if either one of them decides to take a different path, all will not be lost. The beneficiary of a 529 plan can be changed at any time as long as the new beneficiary is a family member of the previous beneficiary. It was reported that 43% of student mothers are expected to drop out. If I attempt to return to college for the 5th time, I can use this 529 plan to pay for that, too.
I place a lot of importance on education in my household. Although there are plenty of ways we can prepare your children for the future, I use 529 plans to guarantee that my children will not have any issues accessing the educational resources and tools they need. Even if they decide not to attend college, the 10% tax penalty for withdrawing the funds for other uses seems minimal in comparison to what it would cost if we needed the funds and did not have them.