Options for saving for college with a short time window (4-7 years)

[Izybat]

DH and I have only recently started getting our financial act together. We've paid off a ton of debt in the last two years ($60,000 or so), and we're saving way more in our 401ks than we were before. We're also getting very close to after tax investing, though we're not quite there yet (sill building our 3-6 moth emergency fund).

However,  my step-daughters are going into 9th and 6th grades, which means they'll be going off to college in 4 years and 7 years respectively. I'm not completely adverse to student loans (they'll give you loan for college, but not for retirement...), but we do want to try to help them pay for some of their schooling, as our parents did for us (I had loans too).

Given that we only have 4-7 years to save, what's the right vehicle for this money? Should we bother with a 529 at this late stage? Just put it into an index fund? Save it in a money market account, etc? I'm hoping the amount we'll be able to set aside for each girl is in the $500-700 range per month (depending on current expenses).

[JoseS]

Here is the plan that we followed with our kids:

1. Find our what state colleges are the cheaper options - https://www.collegetuitioncompare.com/state/
2. Target to have enough money saved for the first year.
3. Use the best 529 available and use an age targeted fund - http://clark.com/education/clarks-529-plan-guide/
4. Ask them to go to community college for the first two years. Most of community colleges have transfer programs for the 4 year colleges. My kids got scholarships and the first two years were practically free. If they want the "college experience," they can just go to the 4 year college campus and hang out in the same cafes and parks as the kids paying full tuition. They'll get invited to the same parties. A lot of community colleges also have the same clubs for sports and activities like backpacking or anything else.
5. Have them work at least half time during the school year and apply the earnings to tuition.
6. Ask them to work for a year before entering college and save for tuition.
7. Apply for any scholarships available during the whole HS senior year.
8. NO LOANS OF ANY KIND
9. Cash flow the rest. You have a lot of time to figure out a budget to do this. Make it a condition of you doing so that they meet the conditions above.
10. Explain to them that if they follow these steps, they will have an undergraduate degree debt free.

[Goldielocks]

First, you don't have only 4-7 years to save... Assuming 4 year degrees, you really have 7-11 years to save -- The colleges accept money on a term by term basis... you don't pay for the final 4th year until you enter that year...

So,  in 11 years, you want to save (and spend) $160k   (2 students x 4 years at $20k per year parental contributions each for live away, in state costs)...
OR ...  do you want to save $90k, assuming that they can live at home on your dime, you pay tuition, and they fund their own residence fees?

That means that you need to save $$14.5k per year (High) to $8.2k per year (Low).
Can you free  up $10k per year from your budget?
  If not, you may need to look into community colleges, FAFSA loan potential, and other loans, or delay entry into college by a couple of years (and they can help work and save for college too).   They can work summers to offset later years' costs, too.  Most will be able to save $4000 minimum over a summer,  so $12k could pay for the final year of in-state tuition, etc .

Lots of options, even though you are only 4 years away.   The key is to have at least the first year fully saved before they start.

[martyconlonontherun]

The most important step you can make is to communicate and have honest discussions on what they want to do and the cost. I went to private college for a communications degree in a field that would've paid 30k a year starting out. I ended up going back for a masters in accounting. I wish I would've had those tough conversations instead of my parents encouraging me to go wherever I wanted and not discuss the long-term financial implications.

I turned out ok, but if they want to go the private route make sure they know how much they are taking out in loans and how they are paying it back.

Its easy for me to say now with no kids, but my plan is to have college mostly funded through a 529 but let that be my secret until after they weighed the cost/benefit and maybe a full year under the belt. Had too many friends in college not care freshman year and dropping classes last minute because daddy was paying for it.

[Izybat]

I'm not opposed to student loans, so there may wind up being some of those. I'm also not opposed to talking about money with them, as we've already started some of those conversations. I wish my parents had talked to me about it, because I didn't realize I was going to have student loans until I got out of college. Surprise, surprise.

We currently live in the middle of nowhere so even community college is a 20-30 minute drive (which would then necessitate us procuring cars for them somehow).  Same goes for having them get jobs in high school. There isn't much within walking/biking distance (like... nothing). I would like them to get jobs, I think it's good experience, but we'll have to see how high school plays out.

We do have some money that is earmarked for them on a monthly basis, so my real question is based around what sort of vehicle is the best for these funds. Should we do a 529? Should we open an investment account at vanguard and dump it into a mutual fund? Should we just dump the money into a (very low interest paying) savings account?

[Goldielocks]

I wish my parents had talked to me about it, because I didn't realize I was going to have student loans until I got out of college. Surprise, surprise.
?

There's a story here!  please tell us what kind of loans you ended up with -- federal subsidized loans, parent plus loans, or something else?  How did you not know what you were signing?

We currently live in the middle of nowhere so even community college is a 20-30 minute drive (which would then necessitate us procuring cars for them somehow).  Same goes for having them get jobs in high school. There isn't much within walking/biking distance (like... nothing). I would like them to get jobs, I think it's good experience, but we'll have to see how high school plays out.

If you are in the middle of nowhere, I think a good used, affordable but reliable car may be prudent for you as parents to make happen.  This enables independence, school jobs, and of course, travelling to community college as a future option.   In this case, $2000 per year towards your portion of transportation costs would not be completely out of the question...  It is a consequence of living ruraly, unfortunately.

[martyconlonontherun]

I wish my parents had talked to me about it, because I didn't realize I was going to have student loans until I got out of college. Surprise, surprise.
?

There's a story here!  please tell us what kind of loans you ended up with -- federal subsidized loans, parent plus loans, or something else?  How did you not know what you were signing?

We currently live in the middle of nowhere so even community college is a 20-30 minute drive (which would then necessitate us procuring cars for them somehow).  Same goes for having them get jobs in high school. There isn't much within walking/biking distance (like... nothing). I would like them to get jobs, I think it's good experience, but we'll have to see how high school plays out.

If you are in the middle of nowhere, I think a good used, affordable but reliable car may be prudent for you as parents to make happen.  This enables independence, school jobs, and of course, travelling to community college as a future option.   In this case, $2000 per year towards your portion of transportation costs would not be completely out of the question...  It is a consequence of living ruraly, unfortunately.

You didnt ask me but it was being in the dark on my end and not fully understanding what I was signing. My mom worked in financial aid and said sign here and here since I had already decided on the school and would need the loans if I were to stay there. They were also helping me a ton but I never really questioned the numbers. Unfortunately even with them paying down a lot of the loans; there was still $50k left over. I was a dumb teenager that was signing 20 loans a semester without really adding it up or asking questions. My parents had great intentions but I wish I would've taken more ownership of it right away.