This is the fifth installment of our Get Out of Debt series based on Dave Ramsey’s bestselling book, “The Total Money Makeover Workbook.”  If you’ve followed the first 4 steps then you are currently debt free except for your house, have three to six months living expenses in savings, and are investing fifteen percent of your income into various retirement accounts.  You are becoming financially fit and are on the right path toward building wealth.  You have your finances under control and you have a growing sense of security.  This next step is not for everyone.  If you’re children are already out of school, or you have no children and are sure that you won’t have children, then college savings are not a worthwhile goal for you.  If, however, you have children who are younger than college age, or the possibility exists that you might have children in the future, then you will need to implement baby step number five in your financial plans.

Every parent wants their child to have better opportunities than they did growing up, but according to a CBS MarketWatch report, 68% of parents have saved less than $10,000 for their children’s college education, which is not much in terms of standard college costs.  Assuming you have successfully completed steps one through four, then now is the time to begin saving for your children’s college educations.  I’ll stress again, you need to take care of steps one through four first.  When flying on an airplane, the stewardess always tells you to put the air mask on yourself first, in the event of an emergency, before helping your traveling companions, including children.  The reason behind this is simple, if you pass out, your no help to anybody, so take care of yourself before you help others.  This principle holds true to finances as well.  You are no good to anybody if you fund your child’s college prior to paying off your debt or saving for retirement.  Your kid will go to college debt free, but at the expense of you being a wall mart greeter at 75, working to pay for your medicine.  Take care of your own obligations first, then begin putting money aside for college.

So, now that you’re convinced you need to start saving for college, where do you put the money?  College tuition has been averaging about 7% increase a year.  This means savings bonds (5% growth), zero-coupon bonds (6% growth), savings accounts (3% growth), are all bad ideas.  Pre-paid tuition grows at 7%, but most of these are state based and will only pay for in-state schools, though to do break even with the investment.  In today’s economy, it is hardly a guarantee that you can fund 18 years of college investment in a single state without moving, and then convince your child to go to a school in that state.  Face it, you just aren’t that lucky.  So where should it go?

Dave’s number one recommendation is an ESA, or Educational Savings Account, which is sometimes refereed to as an Educational IRA because it grows tax-free when used for higher education.  An ESA allows you to invest $2,000 per child per year.  This works out to $166.67 a month.  You can invest your ESA funds into any mix of funds and change your mix at will, making it a very flexible plan.  If you invest $2000 into an ESA from birth to 18, with a modest 12% growth you will have $126,000 saved for college, tax-free.  That same investment would net $72,000 in one of the pre-paid state tuition plans.  If your child is over 8 when you begin saving, or you have aspirations to send them to a more expensive school, or grad school, then you will need to set aside more money than what an ESA allows.

The second college saving vehicle of choice is the 529 plan.  The are state plans, but most allow you to use the money at any institution of higher learning, across state lines.  There are several kinds of 529, so be sure to get the right kind.  The “life phase” plan allows the administrator control of the money to move it to more conservative investments as the child ages.  These perform poorly (8% growth) because they are extremely conservative.  The “fixed portfolio” plan locks you into your investment until you need the money.  The problem is, if you get into some bad funds, your stuck with them.  The “flexible plan” allows you to move your investments around within certain brands of funds, providing both good growth and flexibility.  You can choose from virtually any mutual fund in the American Funds Group, Vanguard, or Fidelity.  This type of 529 is the only one that Dave Ramsey recommends.

If you don’t have time save for college, then being creative and making concessions are in your future.  Your child does not HAVE to go to a brand name ivy-league school.  Your child does not HAVE to have their own apartment and eat pizza hut every night for diner.  Living on campus and eating at the cafeteria saves around $5,000 per year.  Some employers offer work study programs that include generous tuition assistance.  The various branches of the military and the National Guard will trade a college education for several years of service.  If your child is getting into law, medicine, nursing, or education, the government has a program where they pay for the students education.  In return the student agrees to serve some amount of time in an “under-served area” typically in a rural or inner-city area.  Apply for scholarships, lots of them.  There are over $4 BILLION a year in unclaimed scholarships.  Make finding and applying for scholarships a part time job between your child’s junior and senior year of high school.  One student applied for over a thousand scholarships.  She was turned down for 970 of them, but the 30 that accepted her provided $38,000 toward her education.  Working a high-rejection, high-paying sales job in the summers leading up to college can make a huge difference, if the student is willing to work hard.

The point is, even if you don’t have time to put down a good foundation of savings, if you are motivated, and creative, then sending a child to college debt free is still attainable.  The earlier you start, the easier it is, but it’s never too late.  Think about your student loans and how long it took you to pay them off.  If you want your child to have a different fate, then start saving as soon as you are financially fit enough to do so. Get a copy of Dave’s fantastic book from Amazon with the link below.