Funding Your Children’s College Education While Still Teaching Financial Responsibility
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The other day I was reading a post called “Is There a Fundamental Flaw with the 529 College Savings Plan?” on checkbookdiaries.com. The basic premise of this article was that a father wanted his children to pay their way through college by taking out student loans and paying off the student loans. Then, he would reimburse them once they were well established in life. Doing this, he reasoned, would teach his children financial responsibility and the stresses of debt. While I do not necessarily agree with this idea, I can understand the desire to teach your children about finances and debt while still reimbursing them for their college education. After thinking about this for a while, I think I have come up with a solution to do both at the same time while not waiting until my children are well established in life to reimburse them. While I do not have children yet, I am considering using this method in the future. Let me know what you think.
1) Save up for my children’s education. No matter what, I plan on saving for my children’s college education. I expect I will use 529 accounts, but I still have more research to do before I make up my mind. I plan on saving up enough to pay for at least two years of college education for each child, although I have not decided on the specific amount.
2) Pay their tuition. When my children get to college, I will pay their tuition using the money we saved up in their 529 accounts.
3) Treat the tuition payment as a loan. When I pay my children’s tuition, I will expect them to pay the money back to me on a set schedule. That way, they will learn what a loan is and how it operates. If they make their payments to me on time each month, I will refund the entire amount at the end of the pay-back period. For example, if I paid $2000 for tuition, I would set up a year-long monthly payment plan for the child to pay back the $2000. If the child makes his payment each month and pays back the entire $2000, he will get the entire $2000 back at the end of the year. However, whenever he makes a late payment, I will start charging interest (rate comparable to the interest charged on student loans). The amount of interest accumulated throughout the year will be deducted from the refund amount. So, if the child accumulated $200 in interest, he would only get $1800 of the $2000 he paid me back. I am considering doing this for rent in college as well.
I really like this idea so far because it teaches the basic idea of what a loan is (except for the refund part) while also forcing my children to save up money. By the end of their college educations, they could potentially have a significant amount of savings and a better understanding of personal finance. I also think that this method would allow me to convey to my children how important education is to me. If it is important enough for me to pay for it for them, then it must mean a lot.
Do you agree with this idea? Do you disagree? Let me know. I would love some suggestions!
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Adam @ Checkbook Diaries (http://checkbookdiaries.com/):
Hi Olivia. I like the idea of paying the tuition as a loan, and then
reimbursing your child for all on time loan payments once the terms of the loan
are met in full. My parents did something like that when I finished school with
our heating bill. Every month until I moved out I paid the oil bill, and once I
moved out they provided that money to me to furnish the house I had just
bought.
I still have a problem with using the 529 plan though. I understand the tax
benefits, but what will you do if your child does not go to college? I there
are no higher education expenses to be paid and the money is withdrawn, you get
hit with a 10% federal tax penalty. Although I will seriously consider your
idea of loaning the money to my children and then reimbursing them after the
loan is paid back, I will probably opt to use a different investment vehicle to
save that money in.
By the way, I like your blog (added it to my blog roll). Keep up the good
content.