Dave Ramsey’s Baby Step 5: College Funding

by Joe Plemon on November 2, 2009

Creative Commons License photo credit: Will Hale

Just getting to Step 5 indicates that you have been doing some great things with your finances. You are debt free, except for your house and you have a fully funded emergency fund. You are also investing 15% of your income toward retirement. Congratulations! Now, and not until now, is the time to save for your kid’s college.

Keeping the College Education in Perspective

If you, as a parent, have been struggling with guilt because you have not yet saved a penny for college, you are in good company. But Dave points out that our society often considers a college education as a magical “genie in a bottle” that guarantees success. He dispels this notion with several observations. Here are a few:

  • The purpose of college is to gain knowledge. The degree is only a piece of paper.
  • College degrees do not guarantee wealth.
  • College degrees to not even guarantee a job.
  • Success in life is a result of attitude, character, perseverance, vision, diligence and extreme levels of hard work. These need to be added to the knowledge gained in college in order to do well in life.
  • Dave attributes 15% of his own success to the knowledge he gained in college and 0% to the degree itself.

Hopefully, these thoughts will help you keep college funding in perspective. All of the previous baby steps are essential for financial well being; saving for college, while important, is not essential.

But College is Important

Less you think that Dave is trashing college, he isn’t. He is a college graduate and his children are either college graduates or on their way to completing college. A college education is not up for debate in the Ramsey household. It is important, but, as pointed out above, not a magic recipe for success.

So How Does One Save?

In case this isn’t crystal clear, let me explain how much money you have to use for college savings. Baby Step 4 is 15% of your income toward retirement. The college savings comes from any additional cash flow you have in your budget above that 15%. If you have zero extra, then you can’t do any college savings. The following is for those who have cash flow above that 15%:

Dave stresses the importance of using tax advantaged college savings programs such as the ESA (Educational Savings Account) and the State 529 Plan. Both offer the same tax advantages: all growth is tax free.

The ESA is limited to a $2,000 annual contribution per student and is limited to $190,000 AGI (adjusted gross income) phased out to $220,000 for married filing joint return taxpayers. The 529, on the other hand, has no income limitations and in some states, contribution levels of up to a total of $360,000. There are other differences in these plans and one should study them carefully before deciding which to use.

Dave prefers the ESA because it is highly flexible; the owner can choose virtually any stock or mutual fund to invest in. Some states offer 529 plans with great flexibility but Dave warns against those that offer “life phase” plans because they are so conservative that they earn little return.

Whether using an ESA or a 529, the important thing is to actually do the college savings.

What to do When You Don’t Have Much or Any Time to Save

If your child is near college age and you haven’t been able to save for college, Dave has lots of suggestions for getting your children through college without incurring debt. The key is to decide that debt free college is possible. Once that decision is made, your creative juices will start to flow. Here are some ideas:

  • Attend community college for the first two years. For many, this is basically free education. Work and save during these two years to be prepared for the following two years.
  • Attend a state university, not a high dollar private school, for the following two years. Your goal is a college education, not a pedigree.
  • Apply for scholarships…lots of them. Dave tells of Denise, one of his listeners, who applied for 1,000 scholarships. She got turned down 970 times, but the 30 she received were worth $38,000! Not a bad summer’s work!
  • Look for companies that offer co-op work/tuition programs.
  • Work! All summer and part time during college.
  • Consider military or National Guard. You will qualify to get some or all of your education paid for.
  • Delay college. If the money just isn’t there, work for a year, live on nothing and save.


A college education, while very important, is not a magic formula for success in life. If you have completed the previous baby steps and can afford to save for your children’s college, by all means do so. Take advantage of tax advantaged college savings plans.

If you simply can’t afford to pay for all or even part of your children’s college, encourage them to be creative about making it through without debt. Ultimately their education is their responsibility. The work and sacrifice they make during these college years will prepare them for success in life. Not handing it to them for free may be the best gift you can give.


{ 2 comments… read them below or add one }

Craig @ Money Help For Christians November 3, 2009 at 7:39 am

Joe, I completely agree that we need to keep the college education in perspective. People are dropping more and more dollar on a education and it seems like people are learning less and less. When school becomes more of a privilege and less of a right we might actually start benefiting from school again.


Joe Plemon November 3, 2009 at 8:06 am

Craig, Well put. “More of a privilege and less of a right” When I went to college in the 60s it was a big deal…definitely a privilege. I was the first person in my family tree to ever graduate from college. I suppose that as people begin to realize that the cost/benefit of college is not what they expect then they will become more selective about where/if college is for them.


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