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New baby, college savings and student loans

Chris Farrell Feb 15, 2012

Question: My husband and I recently had our first child. We are considering opening a 529 plan for him, but between the two of us, we still have about $15,000 in college loan debt. Our student loans are locked in at a low interest rate (around 3 percent). On the one hand, we know that money invested in a 529 plan now will earn more over time than money invested later. On the other hand, it seems kind of odd to start saving for his college when we haven’t finished paying for our own. Does it make more sense financially to open a 529 plan for him now, or to put the money we would have put into it toward paying off our own student loans first?  Carol, Athens, GA

Answer: Congratulations. It does seem odd to save for your baby’s college education even though you haven’t finished paying for your own. Yet it’s basically no different than saving for retirement even though you’re carrying debt.

My answer to your question is … yes … and yes. Here’s what I mean.

As you well know, since you’re still paying off your student loans, parents feel pressure to set money aside for college because it costs so much to get a diploma. For instance, college tuition inflation has outstripped the increase in the consumer price index by almost 2 to 1 over the past two decades. That’s before including room, board and other expenses. I hear a lot of talk among college and university presidents about the need to moderate the price hikes. I don’t see any evidence (yet) of a widespread embrace of cost containment. I do think that the steep cost of college, stagnant family incomes and too much borrowing is an unsustainable business model — a disaster waiting to happen.

However, getting back to your specific question, I do think it’s important to focus first on getting your household finances in good shape before contributing to a college fund such as a 529 savings plan. I would direct the bulk of your savings toward funding an emergency/opportunity fund, retirement savings and eliminating debts. These personal finance basics come before college savings. That’s one reason behind a yes.

The other yes reflects that I would go ahead and open up a college savings account. Most state-directed 529 plans have a minimum in the $25 or so range. It simply doesn’t cost much to do, and why procrastinate? An added advantage of opening a 529 account (even if you don’t put much in it at first) is that anybody can contribute to it: grandparents, uncles, cousins, good friends, neighbors, etc. Of course, if you’ve got the personal finance basics covered, or when your finances are on solid footing, you can hike how much you put in.

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