Saving for both early retirement and for your children’s college education is difficult. Each requires amassing a substantial amount of money in a relatively short period of time. For most people, those time periods for saving overlap. 

This creates a challenge which may seem like an insurmountable obstacle. Many students and parents assume student loans are inevitable.

My wife and I are both first generation college graduates from middle to lower middle class families. We’ve each earned three college degrees with minimal student loan debt. 

Obtaining the skills to command a professional salary without the debt typically associated with those degrees was a complete game changer for us. We were able to get on the path to financial independence quickly, while many of our peers were drowning in debt. As a parent, this is an amazing gift to give your child if you can. 

I’ll share the framework my wife and I are using to enable our daughter to get off to a similar start. Our strategy is based on techniques we used to acquire our degrees combined with strategies of others featured in my book who have “hacked college.”

I’ll also share tactics that allowed us to confidently be done saving for our daughter’s education before I left my career when she was five years of age. 

Beyond Standard Advice

Typical financial advice around saving for college focuses on a few common themes. First is whether to prioritize saving for college or saving for your own retirement. 

Conventional wisdom says save for your own retirement first, then help your kids with college if possible. Those of us fortunate enough to be considering early retirement can likely do both. 

The question becomes whether to prioritize retiring as quickly as possible or slow our path to financial independence to save for both goals simultaneously. This is a personal decision. 

Our decision was to help our daughter. For others who have decided to help your kids with college, there are more questions. 

Is it better to save for college or cash flow expenses when the time comes? If saving, how much do you need to save? What accounts should you utilize? 

Those are important considerations. But there are more important things to consider first. I propose starting with a larger framework.

Building a Framework

This is a personal finance blog. It’s easy to focus on the finance aspects of our decisions and forget about the personal aspects. Planning for college gives parents a great opportunity to help launch our kids into the adult world and set them up for personal and financial success.

Determining the best way to help your child is one big piece of the personal aspect of this decision that is often overlooked. There are different schools of thought on this.

The Extremes

Some parents choose to pay for everything for their kids. Others feel it is not a choice, but a responsibility to do so. People in this camp often feel it is important to enable a student to focus exclusively on their studies while enjoying the “full college experience.” It is a privilege to attend college without having to worry about financial concerns. 

Others take a completely different approach. Even if it’s possible to pay for their kids college, they would argue that it is important for kids to figure things out for themselves. We all eventually need to become independent adults and learn to make decisions with real financial consequences. Gaining this experience early in life can be valuable.

Finding Middle Ground

Each of these approaches feels like a straw man argument. We feel the best approach is somewhere in between.

Even with school and work, it is possible to have the college experience. For a young student without family responsibilities, it’s an ideal time to learn time management. It won’t be any easier when they are older, have less energy and more responsibilities.

My wife worked full-time while going to school full-time, so we know it can be done and it has benefits. It taught her she was capable of more than most people assume is possible.

Her actions also provided a powerful talking point and resume builder which helped tremendously when marketing herself to future employers. She also developed real world experience and a professional network that gave her a leg up on other recent graduates.

However, it was stressful to the point of having negative health consequences. We want to help our daughter and not burden her with the choice of working that hard vs. starting out with crushing debt.

Thus, our philosophy is that the best approach for most students and parents is one of shared responsibility for paying for college.

Shared Responsibility

We plan to take a similar approach to what my parents took with my brother and I, sharing the responsibility of paying for college. This approach allows parents to provide financial assistance without fostering dependency. It also allows parents to assist in their students financial education by being actively involved in decisions and incentivizing the student’s behaviors.

Making the student have some skin in the game can encourage them to make better decisions as they see that their actions can have real financial consequences. At the same time, they don’t have to experience overwhelming responsibilities and crushing debt that can be the result of trying to pay the often astronomical costs that come with many college degrees without parental assistance.

Using this approach, it is important to understand the considerations and responsibilities of both parties in planning and preparing.

The Parent’s Role

Part of our role as parents is making good financial decisions so we’ll be in position to help pay for college. Having a comprehensive plan can reduce the financial burden on us, while also incentivizing behaviors in our children that will increase their likelihood of long term academic and financial success.

The cornerstone of our plan to save for college is to have enough to help our daughter substantially. However, we want to be careful to place limits on our help so there is no misconception that she has a blank check.

Incentivizing Behaviors

My parents saved as much as they could to help my brother and I with college. They didn’t have the option to save more without jeopardizing their own finances.

My parents showed me exactly how much money I had to work with. They then informed me that as long as I was spending the money responsibly, it was my money. If anything was left after finishing college, it was mine to help me get started in life. If I couldn’t get through school with what they provided, I’d have to take out loans and pay them back myself.

I’ve always been grateful for the financial help my parents provided. I’m even more grateful they didn’t sacrifice more in an effort to pay for everything.

Having skin in the game encouraged me to consider how I was spending their dollars. It motivated me to think outside the box to lower my education costs and living expenses. Learning to live within my means from a young age was as valuable as any formal education I received in college.

This approach has worked well with others I’ve talked with. Nothing is guaranteed, but I’m confident this provides the best balance of meaningful assistance without fostering dependence.

While my situation worked out well, it was in part a happy accident. My parents simply saved as much for my brother and I as they could with the income they had available.

We could have elected to keep working to save enough to pay full tuition, room and board for our daughter at any college if that was our priority. It was not. So we needed to decide how much was “enough.”

Saving “Enough”

We checked current tuition in Pennsylvania, where my wife and I went to school and lived when saving. Tuition in Pennsylvania is among the most expensive in the nation. Penn State University has the third highest in-state tuition for any flagship state university in the country, trailing only the University of Vermont and University of New Hampshire.

Future college tuition was not a primary factor in our relocation plans. However, we knew it would likely be a secondary benefit of our domestic geoarbitrage. The flagship university in our current home state, the University of Utah, has a tuition that is about half that of Pennsylvania’s ($9,498/year for U of U vs. $18,450/year for PSU).

We next looked at the current total cost of education. This is the sticker price that is typically referenced, including tuition, fees, books and room and board. 

According to collegedata.com, the current national average cost is $26,590/year for public colleges and $53,980/year for private colleges. Our experience showed us that with even a little bit of effort, you can pay much less than this price.

We didn’t do any future value calculations to determine what college would cost when our daughter will be that age. We simply used our gut instincts and came up with $100,000 as a target amount that felt right to provide meaningful assistance while requiring her to make thoughtful decisions and contributions.

Using the Rule of 72, we assumed that if we could accumulate $50,000 by age 6 and get a 6% return over the ensuing 12 years, we would be in the ballpark of this goal. We exceeded our savings goal by the time she was five years old, so we’ve stopped saving for college.

Using The Right Accounts

Once we determined how much was enough and figured out how to save that much, we needed to determine where to place the money. 

529 Plans

The most common consideration is a 529 Plan. These plans are broken into 529 College Savings Plans and 529 Prepaid Tuition Plans. 

For those unfamiliar with 529 plans, the link above provides an excellent overview of the different types of 529 plans, benefits of these plans, and links to individual state plans. Physician on FIRE provides an excellent overview of 529 plans from the perspective of an early retiree.

We elected to bypass using a 529 plan. The primary benefit of using a 529 plan is providing a tax shelter to save for qualified education expenses. 

The first tax benefit of 529 plans is a state income tax deduction on contributions. There is no federal tax deduction. Pennsylvania, where we lived when saving, has a flat state income tax rate of 3.07%. Making a contribution of $10,000 would have saved us $307 in state taxes.

Other tax benefits of 529 plans are state and federal tax-free investment growth and tax free distributions. These could be valuable. 

There are several downsides to using 529 accounts. The first is cost. Even the most highly rated 529 plans add additional fees. 

The other major downside of 529 accounts is restricting how the money is used. There is a 10% penalty to withdraw earnings from the account for anything other than qualified educational expenses.

ESA and UTMA Accounts

A Coverdell Education Savings Account (ESA) is another tax advantaged option for saving for education expenses. ESA accounts may offer some advantages for those who would consider using the money for elementary or secondary education expenses.

ESA accounts have two features that make them less attractive than 529 accounts. First, you can only contribute $2,000 per child per year. Thus this account didn’t match our goals of front loading our savings. Second, contributing to an ESA doesn’t provide a state income tax deduction.

Another option we briefly researched was an Uniform Transfer to Minors Act (UTMA) account. This provides another tax advantaged savings option. 

Once you transfer money into an UTMA, the asset belongs to the beneficiary. They get full control of the money at age 21, and you surrender the rights to control how the money is spent. This was a non-starter that outweighed any potential tax benefits for us.

You may have a different opinion and want to do further research on the benefits and downsides of these accounts. 

Taxable Accounts

We ultimately decided our best option was using a taxable account in our names. It will provide most of the tax advantages of a 529 account in our scenario, while maintaining control of the money and flexibility in how it is spent.

We planned to start transitioning to early retirement while our daughter was young. Our low income in early/semi-retirement years means we pay 0% long-term federal capital gains rates on most of our investment income for the majority of the years the money is invested.

Our low income also allows us to use tax gain harvesting to keep the cost basis high and capital gains low. Thus, we will pay little to no tax when taking the money out.

We also are able to avoid any penalty if we do not need to spend the money on qualified educational expenses. A taxable account also provides options with lower investing fees than even the most highly rated 529 plans.

A 529 may be a better option than a taxable account for those with greater tax benefits.

529 plans are also less risky if you have multiple children, if you have other relatives you may want to assist, or if those saving desire further formal education themselves. You can change the beneficiary of a 529 plan at any time without penalty. 

None of those conditions applied to us, making a taxable account preferable.

The Student’s Role

It benefits both parents and the students themselves to be part of the planning process. Having the student be an active participant in the process increases their accountability and incentivizes them to lower educational costs. 

My wife and I were both actively involved in planning and paying for our education. Still there was a lot that we didn’t know, so we could have done better.

This is an area I will continue to explore for my daughter. I plan to share on the blog as I uncover new options and as educational opportunities evolve. The following areas are where we anticipate focusing her efforts.

Work

Working is the first thing that a student can do to earn some income to contribute to their tuition costs and/or living expenses. This provides multiple benefits.

The most obvious is the economic benefit. Even if a student is only working a part-time minimum wage job in a field unrelated to their studies, it allows them to make a financial contribution while developing their work ethic and time management skills.

Working while going to school can provide opportunities to build a professional network. This can set a student apart from other new graduates. A network can be extremely valuable to provide professional references and an inside track to higher level jobs.

Another benefit of working while going to school is learning how far your dollars go (or more accurately don’t go) towards something as expensive as a college education. Most students won’t be able to earn enough to pay for tuition and living expenses.

That’s not all bad. It can encourage the student to think outside the box. There are more useful ways to spend time to contribute to their education than trading time for money in low paying jobs that don’t provide multiple benefits.

Some examples that stack benefits are paid internships or low level jobs in their field that provide experience and income, resident assistant positions that provide free housing, or graduate assistant positions that offer free or reduced tuition in addition to any stipend.

Scholarships

My wife and I each benefitted from scholarships when going to college. She received a few small need and merit based scholarships applied toward her bachelor’s degree. I received one large niche scholarship that covered over half the cost of my master’s degree.

In retrospect, we could have done much better in this area. We will certainly coach our daughter to do so. In the Choose FI book, we devoted an entire chapter to the idea of “hacking college.” One of the people we profiled was Cody Berman.

Berman has put considerable thought into optimizing the process of obtaining scholarships. One of his recommendations is applying for many small scholarships which tend to have less competition and thus increase your odds of getting them. 

He also developed a system of “templifying” the application process. He found that most scholarship applications revolve around a few common themes, so he put considerable time and effort into writing strong essays around each theme. This allowed him to mass apply for many scholarships, spending only a few minutes on each to customize the template essays.

Getting Credits for Less

Another technique that Berman and others who have “hacked college” have utilized involve obtaining college credits at a reduced price. This can be accomplished in a variety of ways. They include taking A.P. classes and exams, CLEP exams, dual enrollment with high schools and local universities, and obtaining credits from junior college either while still in high school or between high school and enrollment at a traditional university.

Many of these options either weren’t available or we weren’t aware of them when my wife and I were going through school. They are a big part of our plan for lowering the sticker price of a college degree for our daughter.

I mentioned earlier that qualifying for lower tuition was not a big factor in where we would relocate. Almost everywhere outside of New England offers lower cost in-state options than Pennsylvania. 

These innovative opportunities to obtain college credits for less did play a big part in choosing our ultimate early retirement location. Other finalists were very small mountain towns with more limited educational opportunities.

Learning and Adapting

The final part of our plan will be a shared role between us and our daughter. If college costs continue to increase at a rate higher than wage growth or general inflation, we’ll continue to explore whether college makes sense. It will be interesting to see how the college landscape changes over the next decade before we have to make that decision.

College will likely always have a place in our society for professions like medicine, law, and engineering.  Other degrees are already becoming unnecessary or obsolete. Getting a degree in a field that doesn’t require particular credentials is becoming less attractive when skills can be obtained in non-traditional ways more quickly and at a lower cost. I’m excited to see what alternative educational options and opportunities exist in the future.

Having financial resources, flexibility and a curiosity to explore new opportunities as they present themselves give us confidence that we’re doing all that we can to give our daughter an opportunity to succeed without substantially sacrificing our own goals of achieving financial independence and retiring early.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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