$500,000 to send my 2 children to college. I’m talking about a 4 year state school…not Harvard.
It’s that time of year: Facebook feeds with college visitation photos and selection decisions…not as much on how they intend to pay for it though (67% of high-school graduates go to college if you were curious).
As a financial advisor, it shocks me how few of my client-parents have established 529 College Savings Plans.
I’m from Oregon and graduated from the University of Oregon (Ducks). We now live in California and I just checked here, and to send one of my non-resident children to Oregon is going to cost well over $200,000! But it will be even more as tuition increases outpace inflation. I think Oregon is a fine school, but seriously!?
The cost of a 4 year education, including tuition, room and board may range from around $85,000 for in-state 4-year public university to north of $200,000 for out of state or public schools. This is 2-5 years of TOTAL income for the average US household. Per child! Virtually impossible that the average American can save this. And not even an easy task for the affluent.
The Wall Street Journal recently reported “Parents’ Can Invest for Years in Kids Sports, but Scholarships are Elusive”. Only 2% of high-school athletes will receive a scholarship in their sport. That is roughly 1 in 50 varsity students. Makes you think differently about spending your hot summer weekend at the ball tournament in Fresno. Family day at the beach perhaps?
It may not be that bad though, as some estimates show that about 2⁄3’s of students receive some aid in the form of scholarship, grant or loan. Most parents have the attitude “we’ll figure it out” and that actually tends to work, but not without pain. Probably good to “figure it out” in a way that minimizes the pain. Hence the 529 Plan.
The 529 College Savings Plan
You contribute after-tax money to a 529 Investment Plan and that money grows tax free until used for qualified education. So for example, you are super disciplined and save $250/month (keeping your older car and cutting back on Starbucks). Assume you earn a conservative average of 5% on that money, then after 18 years you will have invested about $54,000 and earned about $30,000, bringing your total balance to $85,000, which you can now use directly for education expenses. If you save this money outside of a 529 Plan you will pay taxes on the $30,000.
Here are the benefits in a nutshell:
- Money grows free from Federal and State income taxes.
- Qualified education expenses are broad and can include, K-12 tuition, 2 and 4 year colleges, post graduation and vocational schools. Spending can be on tuition, room, board, books, supplies, etc…
- If your children don’t end up going to college of any kind (unlikely), you can change the beneficiary to any close family member: a grandchild, cousin, niece, nephew, etc…
- Here’s more FAQ straight from the IRS.
In my opinion, the best way to get started is to work with your financial advisor or brokerage to set up a 529 plan and then have the contributions automatically deducted from your paycheck. That way you never see the money and don’t miss it. Then try to raise those contributions a little bit each year (after your raise presumably).
If you have children and have not yet done this, get on it today. It’s one of the best tax-advantaged benefits offered in the US.