An ESA Is The Way To Go
Sara has a nine-month-old baby, and she's contemplating how to pay for his college. Her family has suggested prepaid tuition. Is that a good way to do it? Dave says no and makes some other suggestions.
QUESTION: Sara in Tupelo has a nine-month-old baby, and she’s contemplating how to pay for his college. Her family has suggested prepaid tuition. Is that a good way to do it? Dave says no and makes some other suggestions.
ANSWER: I would never do the prepaid college program like MPACT. The reason is twofold. One is you don’t want the state, which is not very well known for handling its money well, to handle your money. Assuming the state handles it well, the second thing is you’re only going to make as a percentage return what the inflate rate of tuition is, which has averaged around 7%, and I can generally do better with my investments than that.
What we recommend is called the ESA (Education Savings Account). You’re allowed to put up to $2,000 per year into that account per child. That’s $166.67 a month maximum. You don’t have to put that much in, but that’s the most you can put in. I would put that in a good growth stock mutual fund that has at least a 10-year—preferably longer—track record. To learn how to set one of those up, I would just go to daveramsey.com, and click on ELP (Endorsed Local Provider) for investing, and they’ll sit down with you and help you get that set up. You can set up a mutual fund very easily to automatically have a certain amount come out of your checking account every month. Then the new baby will be going to college, and that’s a cool thing. Congratulations on thinking that far ahead. The truth is if you start right now, you can really do this right. I would get started.