$1.2 trillion in student loan debt and climbing. $3,000 more per second. $8 billion in defaulted loans as of 2012. They can be passed on to your family after your death. Starting a college fund as a birthday gift for a kid doesn’t sound so bad now does it? 🙂
I’ve written a lot on this site about how crappy student loans are. They aren’t going away any time soon. As much as politicians talk about free college as a selling point to get a vote, the reality is that many people won’t qualify for whatever is proposed (which is already the case on forgiveness programs).
I’m sure you’re all wondering why I’m talking about kids. We all know it’s not my thing.
My wife and I have a really good friend that started a college fund for her one year old son’s birthday party, and it was the only gift she requested for him. I thought it was the coolest thing ever!
Why starting a college fund as a birthday gift is a great idea:
It’s easy
I don’t have kids yet, but I have a feeling that trying to figure out what to tell people to get them every year for their birthday and holidays is a bit of a challenge.
As a toddler, they will drool on whatever they get for a few months and then never use it again. If they are a little older, they will probably break whatever cheap toy it is. If they are a teenager, video games only stay relevant for a little while. Getting them something that will have a lasting impact on their life sounds a lot better to me!
Also – there are no age limits, income limits, or contribution minimums to 529’s…which is pretty sweet.
College prices are continuing to rise
Seriously. It’s insane. College tuition costs rose 275% from 1970-2013 (after adjusting for inflation). Just like debt isn’t going anywhere, those rising rates aren’t going anywhere either. I have no idea how people will afford college 10 years from now even WITH an unlimited loan term.
529’s make it easy for the gift-giver
For our friend’s son, we wrote a $50 check (I think…I just told Coral to handle it) and called it good. Even at just one birthday party, a few $25-$100 checks adds up quickly.
Imagine what would happen if people contributed to the fund every year for 18 years with interest? I’ll show you in a second.
You can also use an online service like GiftofCollege.com. It basically allows you to connect an existing or new 529 plan, and then invite friends or family to contribute via credit card. You can also buy their gift cards from “local retailers” (aka Walmart probably).
Now let’s crunch some numbers
Let’s say you had 10 friends contribute $50/year to your child’s fund for 18 years. Let’s also say it grew at 2% interest. We aren’t using any starting contribution amount for the fund in this scenario. Here’s what those contributions turn into when your kid is college aged:
$10,706.16
That would buy some textbooks, right? According to Bigfuture.com, college books and supplies cost about $1,298 yearly. That’s $5,192 after four years, or $6,490 if you took 5 years to graduate like me! 🙂
If $500/year seems out of the question, that’s fine. Even HALF of that amount would still make a difference when you or your friends are trying to put a kid through college. Every dollar that doesn’t turn into student loans later down the line is worth it. Seriously.
What are the downsides?
Obviously, little Jonny isn’t going to be happy with getting money he can’t use every year for his birthday. I’ve tried to explain money to 10 year olds when I was a teacher…and that $hit usually doesn’t work very well unless it’s about candy bars or something.
Here are my thoughts:
Maybe you could let your friends and family do the contribution to the 529 and you buy your kid something really cool for their birthday? Heck, even spend a ton of money on it…at least it won’t have interest attached to it later on (unless you finance a car for your kid, in which case I don’t know what to say to you). I’d take that deal any day of the week.
I’m really really really curious if anyone has tried this before and how well it works! I’d love to have my future kid’s birthday gifts planned out for the next 18 years!!!
Live differently, your bank accounts will thank me later. ~M$M
About Millennial Money Man
Bobby Hoyt is a former band director who paid off $40,000 of student loan debt in 18 months on his teaching salary and then left his job to run Millennial Money Man full-time. He helps other Millennials earn more through side hustles, save more through budgeting tools and apps, and pay off debt. He is a personal finance expert who has been seen on Forbes, Reuters, MarketWatch, CNBC, International Business Times, Business Insider, US News, Yahoo Finance, and many other personal finance and entrepreneurship media outlets.
Comments
The Green Swan
I think that is a great idea. Even if college is going to cost a quarter million 18 years from now, every little bit matters! We have been focused on fully funding our kid’s 529 plan as early as we can to take full advantage of the tax efficient growth. Grandparents and great grandparents have given cash for birthdays which we basically then just put into his 529 account. I may have to look into the Gift of College website, sounds very simple. Thanks!
Jeff
Every time our kids get birthday or Christmas money, I put it into their 529. My wife and I are too busy trying to pay down our loans to start contributing to our kids’ savings for now, so it is a good base for their accounts. My daughter has enough to cover little more than 1.5 credit hours at PSU ($669.95/hr!!!!) after 4 years, and my <1 son has almost half a credit worth… But better than nothing, for sure.
Millennial Money Man
Nice Jeff! Holy lord…almost $700/hour. Crazy. I agree, absolutely better than nothing when you are facing ridiculous numbers like that.
Nadine Perry
Jeff, I totally feel your pain. Cate’s masters degree with BU was a little over 800 a credit. Yes no typo there. And she stepped away USC because it was more expensive. Crazy right?
Good luck,
Nadine
Millennial Money Man
That’s an awesome strategy – I totally agree that anything helps. It’s crazy how quickly student loan debt adds up!
Stefan - The Millennial Budget
Never thought about this idea other than contributing to the fund myself. I think this is an idea a lot of people can get behind and as you showed above, it can compound quickly and save a lot of money. Textbooks were quite an unexpected expense for me and my parents when I started college as they are so darn expensive. Cost will continue to rise so I think this is perhaps the best gift a child could receive, even though they won’t appreciate it until they graduate debt free or with significantly less debt!
Millennial Money Man
Ha yeah textbooks are pretty unbelievably expensive. Definitely one of the lamest things about college and I’m assuming a huge money maker for them as well.
Roger
We’re just going $100 per month for both of our kids for now. There are more important things that need our attention. In 14 years, it’ll grow to about $35K, but post-secondary education here in Canada will cost at least $100K (living at home). So whatever we have then will pay for the first year or so.
Millennial Money Man
Man that’s so cool Roger – I don’t know why I had thought of doing something like this before. $100/month is totally doable for a lot of people out there (especially if they drop cable) 🙂
Kate
I love this idea! A couple years ago I told my friends that I would no longer be buying gifts for their kids. It’s not worth the effort for me to purchase something, only to have them forget about it a day or two later. Instead, I offered to set up and/or contribute to either a 529 plan or a custodial brokerage account. Only one friend took me up on the offer and she already has 529 plans for her kids so we decided I would set up brokerage accounts for them so that I can teach them about money as they get older. They are 3 and 5 right now, and have no idea the accounts exist, and aren’t able to touch any of it until they are 21. Trying to figure out the right age to start talking to them about it so I’d love to hear recommendations.
It makes me really happy that a lot of parents agree that their kids have way too many toys. It’s not just the clutter or annoyance of buying gifts that aren’t really valued, but the environmental aspect is huge. Have you seen all the packaging on kids’ toys? It’s crazy!
Millennial Money Man
Dang that’s awesome – the custodial brokerage account is a really really cool idea! I’d start freshman year of high school. That’s when you can get them hooked and get them WAY into financial discussions. You’ve gotta remember – every kid wants to be rich, so they’ll eat it up at that age.
Ha yes I’ve seen the packaging. I’ve got two nieces and a nephew now!
Eric
We started one for our Nephew, right about March 2008. Only put a little money in, but it has grown very nicely.
In regards to our own daughter, when people want to give her gift cards, cash, etc, we always direct those amounts to her college fund. Has helped us build up a fair amount for her only being 4-years old.
Another upside is the small amount of tax savings on the contributions when someone else funds them, but we make the deposit!
Millennial Money Man
Yeah man! That’s awesome Eric. You’re totally right on the tax savings, you can write it off! The more I think about it, the more of a no-brainer this thing is 🙂
Martin - Get FIRE'd asap
Hey there Mr M$M, what a great Idea!! At the weekend I went to the birthday of my girlfriend’s 8-yo niece. As her friends arrived, they presented here with parcel after parcel of complete junk. All given with the best of intentions but all in all it was just mindless plastic waste. By the time she’d open most of them, you could see that the initial joy and excitement was gone.
Most of the adults continued to ‘ooo’ and ‘ahhhhh’, in that typically mindless way adults do at kids birthday parties. All I could see was a bunch of suckers shelling out hard earned cash to buy useless rubbish because that is what’s expected.
So, I love your idea. Enclose in the invitation, a note explaining that you don’t want gifts. If you want to make a gift, a donation to the kid’s college fund would be appreciated. And I bet most people would far prefer that than contributing to the growing amount of waste we produce each year.
And as the parents, get them one, worthwhile gift that really means something to the kid. Great post. I love it.
Millennial Money Man
“Parcel after of parcel of complete junk” <—That actually made me laugh out loud, but it's so true!
Every time I buy stuff for my nieces, I always do it knowing that they will stop caring about whatever it is in a few weeks/month just because that's the nature of toys. I think it would be a good idea to start one of these for them as well!
Christa Szabo
This is a really good article!! I have a friend who started college funds for her two godsons that are the old school giant pickle jar with change in it. I’ll have to send this to her so that way her change can accrue a bit. Thanks for the great articles!
Millennial Money Man
Hehe no problem! It’s such a great idea right? Kinda one of those no-brainers that I hadn’t thought of before. Every penny counts!!!!
Amanda @ centsiblyrich
Wonderful idea, Bobby! I wish I could go back in time… My kids get too much money from their grandparents for birthdays and holidays, so we make them send half to their 529 plans. But I wish we had thought of starting it as a gift giving option a long time ago! Also, if I was on the hook for a gift for someone else’s kid – I would be much more likely to contribute more money toward a 529 than I would spend on a toy they’ll play with for one day.
Millennial Money Man
I agree! Feels a lot better to help with something useful rather than something they will just throw away.
Valary
Looking back, we should have invested differently but anytime our children were given money for birthday’s or Christmas we always made the put at least 50% into savings. If they received a crazy amount, it would be 75%. As they got older (middle school and Jr. High) they didn’t care for this concept too much, but now they sure like having all that money in savings.
Millennial Money Man
That’s awesome! Yeah I could imagine a kid not really being into it when they are young, but they don’t even know what the heck is going on with they are super young so why not put it away? 🙂
Nadine Perry
I opened 529s for both my grandchildren when they were born and make contributions during birthdays, and holidays. IT’S ADDING UP! My daughter promotes the link to the gift of college registry in the birthday invitations so people are encourage to donate rather than buy more stuff.
I am a huge fan of financial gifting especially for the college grads (mine included) that have student debt. I convinced both my girls to link their student loan accounts to GOC and family is helping them out too.
Traditional gift giving is changing and I am happy to see more people are seeing the benefits of 529 gifting.
Julie @ Millennial Boss
I’m becoming “that family member” who buys education gifts for the kids. Oops! I can totally relate. I think every kid needs one person like that and another person who can provide the fun ‘right now’ gifts.
Alexa
So glad to hear people talking about 529s! I’m a current college student- starting my final year Sept. 26- and the 529 my mom set up for me has been the best thing, as it relieves a lot of the financial burden (at least for big payments, etc.). If you are thinking about setting one up for your kids or those of a friend or family member, absolutely do it, you will not regret it!
Anne
When I had my son at the ripe old age of 40 (you know – after getting financially stable!!) my financial guy suggested I start my sons 529 BEFORE he was born. That way I would already be accustomed to the money being “gone”. I contribute the amount that is tax deductible in my state ($2k/yr) and then have a money market fund for any other contributions. Other thing I have told all the grandparents, friends, etc. is that Jr gets one toy only per person for birthday and holidays; after that it’s college fund, books, or clothes. Even with that, he gets way more toys than he needs… And has a great jump on college!
Millennial Money Man
Wow Anne – there is sooooooo much awesome in this comment! 🙂
What a great tip on starting it before the child is even born. With the way college tuition keeps increasing, it’s never a bad strategy to start saving early.
Nadine Perry
That’s awesome Anne! I love the idea of one gift + college fund, books or clothes. Going practical is “priceless.”
Best,
Nadine
Christina
We give money to our neices/nephews and it goes right into their college fund. Their parents are keeping a running list of everyone who contributes and will give the list to the kids when they are allowed to access the money!
Millennial Money Man
Woah that’s a really cool idea Christina!
Andi
Hi! A couple of questions.. My niece is turned 1 today and I would like to gift her a 592 but I’m kind of confused as to what to do and where to start? I am in Texas too so hopefully you could be of some help. I don’t have a ton of money at all (about to graduate) but I want to get it started so that my family can begin contributing to it and I would like to have it set up by the holidays. Basically I guess my question is, do you know of any resources that give you the steps of what to do? I just keep seeing these warnings about hidden advising fees and I’m just confused by that. To set it up do those fees come out of pocket?
Millennial Money Man
Hey Andi! Here are two great resources on the how-to’s of setting up an accounts as well as a breakdown of potential “hidden” fees:
http://www.savingforcollege.com/questions-answers/article.php?article_id=150
http://www.bankrate.com/finance/college-finance/9-stealthy-529-plan-fees-to-avoid-1.aspx
Setting up the account is fairly easy and can most likely be done through your existing stock brokerage (that’s what we are doing). Feel free to email me if you need anything else! 🙂
Sara
Do you have any suggestions on how to bring this up to siblings if you would like to gift their children college money? We normally do not talk money with our siblings but with 3 nephews and 1 niece I would rather contribute to something bigger than another useless toy.
Millennial Money Man
Honestly, just do it. They’ll probably really appreciate it!
Jaren
100%. When I, and each of my four siblings were born, my dad started up a 529 for each of us. He continued to contribute to each of them until we each turned 18 (not sure at what rate). Of course this couldn’t cover the entire tuition/housing/books for each kid with rising tuition costs, price differences between universities, etc. But it definitely helped in the long run. Couldn’t give you the $$$ amount for each one of us since our dad didn’t want us thinking we could just pull from it whenever (it was strictly for tuition or emergency needs while in college).
Definitely feel this post and side with it completely!