Having three kids who we hope to send to college one day, it was important to my husband and I to develop a financial plan soon after they were born.  We did the math and realized having them back to back meant paying for college 8 years straight!  According to The College Board, the average cost to attend a 4-year in-state public university today is $18,391.  Take a few Tylenol and insert that number into this college cost calculator to estimate the amount you’ll need to send your little one(s) to college.

Some of you may be wondering when you should start saving for college.  I never advise starting until you are debt free, have a 3 month emergency fund, and are contributing at least 10% toward retirement.   As much as we want to help our children finance college, there are many other options – scholarships and grants, the military, work and pay-as-you-go,  and state programs to name a few – that don’t involve you going deeper into debt.  Trust me, your kids don’t want the additional worry of supporting you later in life because you lost sight of your financial priorities.

My husband and I have a three phase plan to finance college for our now 12, 10, and 8 year old children.  I’m sharing it with the hope it will help you decide which path is best for your family.  I’m always looking for new options to ensure my kids graduate from college debt free and would love your feedback!

Phase I – The Post 9/11 G.I. Bill

Since my husband serves his country as an active duty Marine, he was eligible to transfer this VA administered educational benefit to his dependents.  When the Post 9/11 G.I. Bill was signed into law in 2008, we didn’t waste any time completing the transfer!  You have to transfer at least 1 month of benefits to any dependent you want covered later on.  You’ll be able to change this allocation at any time (even if you’ve retired) in the future as the need arises.  Please note, Marines are required to complete an additional and simple step before the transfer is a success.  With this benefit, we’ll receive 36 months (4 academic years) of tuition, a monthly housing allowance, and a stipend for books and supplies.  Additionally, if  the university participates in The Yellow Ribbon Program, there’s more funding available to us.  Assuming our oldest doesn’t receive a dime in scholarships, we should be able to use this benefit to cover close to 100% of the cost!  Any unused months will then be added to child #2.  To my fellow military families…don’t wait until it’s too late to take advantage of this amazing benefit you’ve earned.  Not everyone is eligible to transfer their benefit and there may be additional service requirements, so check here to see if you qualify.

Phase II – Coverdell Educational Savings Accounts (ESA)

Due to the low annual contribution limit of $500 at its inception (it’s $2,000 today), Coverdell ESAs weren’t a very popular choice for many parents.  However, knowing our contributions at the time would not exceed that amount for each of our kids and we were well under the income limit, that’s where we started.

Moving every 2-3 years means dealing with a new school district and unforeseen costs.  I love having our ESAs as a means to assist with K-12 private or public education expenses if needed.  Expenses may include a computer, printer, internet access, books, supplies, uniforms, before/after care at their school, and tutoring.  Funds in your ESA can also be withdrawn tax-free and used for higher education expenses like tuition, fees, room & board, books and some equipment.

Unlike the Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) where the child/beneficiary controls the funds as young as age 18 in some states, you control the ESA until they reach age 30.  If there are still funds in the account at that time, they will be distributed to the child and a penalty must be paid if not used for education.  Unused funds may be placed in a 529 account for the child or given to another member of the beneficiaries family.  I’ll explain why I’d put it in a 529 later.

Phase III – Virginia 529 Saving Plan

We chose to open 529 savings plans (not prepaid) for each of the children in our home state of Virginia.  Like VA, your state of residence may offer tax benefits on contributions you make to their plan.  529 plans do not have the same income and contribution limits as the ESA, and are often more attractive to higher income earners.  Like the ESA, funds can be withdrawn tax-free to cover the cost of higher education worldwide.  In other words, you can be a resident of VA, have a CA 529 and send your kids to a college in Spain.

One of the main reasons I like the 529 is the ability to transfer any unused amount to a family member (as defined by the IRS) regardless of their age.  This means, after the ESAs have been exhausted or transferred into a 529 and there are still funds available after all the children have finished school, we can rollover the remaining balance to either of us.  Since the money in the account must be used for educational expenses to avoid taxes and penalties, “we’ll suffer” through ceramic and cooking classes on Italy’s Amalfi Coast!