Everyone with children should contribute to a 529 plan. It is a tax-efficient way to save for college since none of the gains are taxable if used for approved college expenses. But maybe you're wondering when to stop contributing to a 529 plan given you've already contributed a lot already. Let's discuss.
Today, it costs about $200,000 in total for four years at the most expensive public colleges and about $400,000 for four years at the most expensive private colleges. With just a 5% compound annual growth rate, in 18 years, we're looking at nearly $500,000 for public college and almost $1 million for private college.
Without saving for college in a 529 plan, you or your child might end up saddled with tremendous student loan debt. Or they might not be able to attend the college of their choice, which would be a shame if they worked diligently in high school.
If they can't secure a well-paying job after graduation, they might not launch into adulthood for years. In turn, they might start feeling like a failure and hating the world. And if they hate the world enough, terrible things can happen.
Given the high future cost of college, most households focus on saving and investing as much as possible. Saving for college is one of the biggest strains placed on families today. However, it's also worth considering when to stop contributing to your child’s 529 plan.
I've figured out the answer.
529 Plan Contributions: A Personal Reflection
As parents, we have a responsibility to educate our children and help them launch. It's up to you how much you want to help pay for their college education. I've decided to save enough by the time they are 18 to cover all of it, if need be. My parents paid for my public college education at William & Mary, and I will pay it forward.
In 2024, I haven't contributed to either of my two children's 529 plans. It wasn't intentional; I simply didn't have enough liquidity to contribute. If I had money, I would have kept contributing like a zombie on autopilot. In turn, I may have ended up over contributing.
We were living paycheck to paycheck for six months after our house purchase in October 2023. During this time, our focus was on saving as much as possible to feel secure again. I also wanted to boost public equity exposure. Unfortunately, for our children, their 529 plans took a back seat.
I thought I would feel bad not contributing to their 529 plans. After all, we had super-funded both plans and we had been contributing to our son's plan after the 5-year period ran out. But I actually felt relieved because I'm not convinced spending a fortune on college is a good idea.
Then it hit me. You'll figure out when to stop contributing to a 529 plan just like how you know when you'll reach your Coast FIRE number. For early retirement seekers, this logic makes perfect sense. Hi
Coast FIRE and the 529 Plan
Your Coast FIRE number is the amount you need to accumulate in your investment portfolio where you no longer have to contribute, thanks to forecasted compound returns by traditional retirement age.
The formula for Coast FIRE is A / (1+r)˄t, where:
- A = the amount needed to achieve financial independence (FIRE), which can be calculated as 25X your expenses or 20X your average gross income
- r = the annual rate of return after inflation
- t = the number of years investments have to compound
For example, someone who is 30 and plans to retire at 60 will need an investment portfolio of $400,000 generating a 7% annual return to reach $3,044,000 upon retiring. The $3,044,000 can produce about $120,000 in passive investment income using a 4% withdrawal rate. Good enough for this person to live their desired retirement lifestyle.
We can use the same Coast FIRE number logic to determine when to stop contributing to a 529 plan. With college expenses, it's much easier to model because we know what the expenses are today. All we need to do is figure out a reasonable expected college expense growth rate after calculating the current costs today. We know within a one-year timeframe when our children will go to college.
Stopping contributions once you've achieved your “Coast 529 Plan Target” is less risky than stopping contributions once you've reached your Coast FIRE target for retirement. College is usually only four years, while retirement could last for decades.
Case Study On When to Stop Contributing to a 529 Plan
To put this Coast 529 Plan target concept to work, let's use a case study of an Asian-American family with a seven-year-old boy named Jack and a four-year-old girl named Jill. They have a household income of $300,000, live in a modest home, drive a 10-year-old car, and highly value education.
The parents, aged 39 and 42, are wondering whether they've contributed enough to their two 529 plans so they can focus more on building up their retirement plans. Their net worth is roughly $2.3 million, including the value of the two 529 plans.
Jack will graduate high school and start college in 2035. Assuming a 5% annual growth rate, the cost of four years at a private college in 2035 will be about $684,000, up from $400,000 today. To be conservative, I'm using the total cost for four years at some of the most expensive private colleges, like USC and NYU. I've also rounded up the $400,000 cost today.
Ways To Pay For College
In this example, the parents want to pay for 100% of all college expenses from a 529 plan. However, households can pay for college through income parents earn while their kids are in college. College students can contribute by working part-time. Parents or students can take on student debt. Or, parents can even try to game the financial aid system to receive free money.
The parents say they are of average intelligence, hence, it is unlikely their kids will be geniuses who win academic scholarships. In addition, as Asian Americans, their kids don't fit the profile for colleges to give them special treatment. Instead, their kids will likely have to try harder to gain the same chance of admissions. Such is life.
If we assume the worst financial outcome, there is upside. If we assume the best financial outcome, there is downside. Always assume the worst when conducting financial modeling.
Jack's Current 529 Plan Balance With 11-14 Years to Go
After super-funding Jack's 529 plan in 2017 and receiving contributions from the father, mother, and grandparents, Jack's 529 plan balance hovers around $400,000. During the low of the 2022 bear market in October, his 529 plan balance was around $256,000. Hence, there is no guarantee his 529 plan will keep performing steadily by the time he attends.
Unfortunately, because his parents chose a target date fund, Jack's 529 plan has significantly underperformed the S&P 500 by at least 30%. If they had invested 100% of the contributions in an S&P 500 index fund, he would have over $530,000 today. The plan's compound annual return is only about 7.7%.
If your kid is still 10+ years away from attending college, it's probably best to invest the majority of their 529 plan in an S&P 500 index fund. The potential returns will likely be greater.
The parents no longer need to contribute to Jack's 529 plan because he has reached his Coast 529 Plan Target. Assuming a 5% compound annual growth rate over 11 years, the $400,000 will grow to about $684,000.
Given that all proceeds from a 529 plan are not taxed, Jack's realistic worst-case college education costs are covered. His parents will not let him be a “super senior” and take five years to graduate. Instead, they will urge him to graduate in three years to save money.
How the 529 plan will be spent starting in 2035:
- One-fourth of the $684,000, or $171,000, will pay for his first year in 2035. This leaves $513,000, which may grow at 5% to $538,650.
- One-third of $538,650, or $179,550, will pay for the second year, leaving a 529 plan balance of $359,100. This $359,100 balance may grow by 5% to $377,055.
- One-half of $377,055, or $188,527, will pay for the third year. The remaining $188,527 may grow by 5% to $197,953, which will be used to pay for his senior year in 2038.
The risk is that a 5% annual compound return assumption may be too high or college costs rise higher than 5% a year. If the compound annual return is only 4%, the plan's balance falls to $615,000, leaving them about $69,000 short. However, if that's the case, the difference can be covered through active income, passive income, or Jack working summer jobs.
Once the compound annual 529 plan return drops to under 4% is when the shortfall will start to be significant. Beware.
Daughter's Case Study On When To Stop Contributing To A 529 Plan
Their daughter, Jill, is four and a half and will likely go to college in 2038. Using the same worst-case assumptions, $400,000 for four years of private college today, with a 5% compound annual growth rate, will cost $791,972 in 14 years. But if the compound annual growth rate rises to 6%, we're talking $904,000. Ouch!
With 14 years of growth to go, is $330,000 in Jill's 529 plan enough to pay for all four years? Let's run the numbers in a compound interest calculator. During the October 2022 low, Jill's 529 plan was only $185,000. Unlike college tuition, sadly, 529 plan values can and will go down.
Jill's 529 plan would need to compound at 6.5% annually for 14 years to reach $796,000 to pay for all four years at a private college.
While 6.5% is certainly possible, it’s a little aggressive given that most of her plan's money is also in a target date fund as well. As the plan approaches the college start date, more money will be allocated to bonds to reduce “sequence of returns risk.”
Need To Save More In Her 529 Plan
A more realistic return assumption is 5% (not 6.5%), like the one I used for their son Jack. With a 5% compound annual return over 14 years, Jill's 529 plan will grow to only $653,337. This leaves us short $138,635. To grow the plan to $791,972, which is the projected cost for four years of private college starting in 2038, she needs $400,000 today using a 5% compound annual growth rate.
As a result, the parents need to focus on contributing more to their daughter's 529 plan. The problem is, they don't have $70,000 lying around to make her plan worth $400,000 this year. Hence, their goal is to try and contribute $35,000 this year, followed by $35,000 next year.
Depending on performance, they will likely have to contribute another $20,000 the following year because they will have one less year of compounding. The four-year cost of college starting in 2025 will be around $420,000.
The Coast 529 Plan Target Amount
If you haven't figured it out, once your child's 529 balance equals the current cost of all four years of college today (private or public), you can stop contributing to the 529 plan. You've reached your Coast 529 Target Amount, which should grow at a similar rate, if not faster, than the cost of college.
Below is a chart I've modeled using $140,000 for a cheaper public college, $200,000 for an expensive public college, $240,000 for a cheaper private college, and $400,000 for an expensive private college for four years as a base case. I've increased these amounts by 5% each year until 2045.
These amounts represent your Coast 529 Target Amounts. Choose which route you'd like your children to take and save accordingly.
If your 529 balance is below these amounts for a given year, your goal is to keep contributing if you want to fully fund college. The one caveat is that once your 529 plan balance exceeds a certain amount, you're not allowed to contribute anymore.
Currently, the balance limit ranges from $305,000 in New Jersey and Hawaii to $575,000 in Arizona. Hopefully, the law will continue to raise these limits as college costs rise.
The Coast 529 Plan Target amount where you can stop contributing might seem obvious now. But it wasn’t clear to me until I wrote this post. Before, I was essentially estimating how much would be enough and using my son's balance as a barometer for my daughter's balance.
The Simple Plan To Save Enough In A 529 Plan To Fully Fund College
Once you have a clear financial goal, it's easier to achieve it. Do the following if you want to save enough in a 529 plan to fully fund four years of college:
- Superfund a plan before or once your child is born, or come as close to possible. Recruit grandparents to contribute too.
- Contribute the maximum annual gift tax exclusion amount after the five-year period post-superfunding is over. The current limit is $18,000 per person and will go up over time.
- Invest 100% of the 529 plan contributions in an S&P 500 index fund for 15 years or until you hit your Coast 529 Plan Target. Then, lower your equity allocation by a percentage equal to 50 divided by the number of years left until college begins. For example, if your child is five years away from college, reduce the equity allocation by 10% a year until you have a 50/50 equity/bond allocation.
- As long as the 529 plan balance is below the Coast 529 Target amount, keep contributing up to the maximum gift tax limit per person. If you can enlist help from grandparents, even better.
- Once you hit the Coast 529 Plan Target, stop contributing. If the plan balance falls behind that year's estimated four-year all-in cost of college, then start contributing again.
- Check out Vanguard's college savings calculator if you want to play with more variables
Be as serious about contributing to your 529 plan as you are contributing to your 401(k) plan or other tax-advantaged retirement accounts. Over time, the balances should snowball to amounts of significance.
Change The Plan If Conditions Change
Obviously, there is a chance you might never hit the Coast 529 Plan Target amount. That's OK. Just do the best you can by continuing to save and invest in a 529 plan. Your family will be much better off compared to a family who didn't aggressively save and invest for college.
If you reach the legal limit for contributions to a 529 plan, then invest in a taxable brokerage account, real estate, or venture capital. Invest with a long-term time horizon.
One of my favorite investments to pay for college is buying a rental property when your child is born. By the time your child turns 18, your rental should generate enough income to help pay for college. Alternatively, you could sell the rental and use the proceeds to cover part or all of the college expenses.
During your savings journey, you might also decide that private college isn't worth it. If so, you could cut your Coast 529 plan target in half by opting for a public college. The great thing about you is that you're dynamic and no longer a zombie college saver!
Be Realistic About Your Children's Abilities
If you think saving $500,000 – $1,000,000 for college per child is ridiculous, I agree! But I also encourage you to run the numbers in a compound interest calculator yourself. Just as college expenses will grow, so will your investments, most likely.
Lower your expectations of your children's academic achievements and extracurricular prowess. Chances are, they won't get straight A's, score 1500+ on the SAT, or earn a bunch of merit scholarships. They also might not opt for the practicality of going to community college before transferring to a public college to save money.
The less you expect from your children, the more you need to save for college in a 529 plan. On the other hand, the more you expect from your children, the less you need to save for college. However, you also face a higher chance of disappointment with high expectations.
Carefully observe your children's intelligence, work ethic, and talents. By the time they are 14, you will know whether your child is “gifted and talented” or just an average person.
If you are fortunate enough to have money leftover in your kids' 529 plans, roll over as much as you can into Roth IRAs for each child. Then, choose new funds to invest that's left over in the 529 plans and hopefully use the funds for your grandkids.
I’d much rather gift a 529 plan to fund higher education than just money. Wouldn't you? You shouldn't fear over-contributing to a 529 plan because it is one of the best ways to tax-efficiently transfer generational wealth.
My Additional Investment Beyond The 529 Plan
Since I'm willing to invest $500,000+ in two 529 plans to pay for college, I'm also willing to invest $500,000+ in various public and private artificial intelligence companies that might make their education obsolete. AI is my hedge as well as my potential home run investment.
With the way technology is progressing, millions of well-paying jobs could be eliminated in the future. We constantly see the Millennial generation (born 1981-1996) complain about the Boomer generation (1946-1964) for having it so easy with cheap housing and plentiful jobs.
I'm sure Generation Alpha (2010-2024) will complain when they are adults about how my generation, Generation X (1965-1980), had it so easy too. What luck to be able to invest in AI early on, along with own cheap housing and have plentiful high-paying jobs too. Of course, nothing seems cheap today. But I'm pretty sure they will 20 years from now.
We parents must invest for our children's futures because they are unable to do so for themselves. We must also impart as much wisdom as possible before they leave home. If we can do these two things, we should be able to rest easy knowing we did our very best.
Reader Questions and Suggestions
How do you figure out when to stop contributing to a 529 plan? Do parents and grade school students realize how expensive college will be in the future? What do you think is a reasonable college expense growth assumption into perpetuity, if not 5%? Are parents expecting too much out of their kids and not saving enough for college?
Invest In Your Children's Future Wisely
In addition to contributing to a 529 plan, which invests in stocks and bonds, consider investing in private artificial intelligence companies as well. When your children grow up, AI will be ubiquitous, and might even take away many high-paying jobs. It's worth investing in AI today as a hedge against an uncertain future.
Check out the Fundrise venture product. It is open-ended with just a $10 minimum investment. Unlike traditional venture capital, you can see the types of private growth companies it holds before investing. It holds promising private AI companies such as OpenAI, Anthropic, and Databricks.
I've personally invested $152,000 in this product and plan to dollar-cost average until I have a $250,000 position. In 20 years, I don't want my children asking me why I didn't invest in AI near the beginning!
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Another consideration.
We live in Georgia. For well qualified high school students, Georgia has a lottery funded tuition program that pays 90-100% of tuition to state schools. Of course, the student must maintain good academic standing to continue in the program.
All 3 of our kids went to college in Georgia at UGA. We only paid for housing, books,food, vehicle maintenance & insurance and other incidentals.
Also, we made it clear early on that we would pay for an undergraduate education, but any graduate studies would require them to get grants/loans, work, or self-fund in some other manner.
just my 2 cents.
Is it a good idea to draw equity from a House (through HELOC, at today’s at interest rates, say around 7.75%), and Superfund the 529? Reason being a growth plan is showing a 13% CAGR for the previous 5 years albeit on a low base… Thus we get to make 5% extra.
Asking for clarity (pros and cons) because it essentially means borrowing money and put into stock market which is volatile inherently…what does sound financial planning, especially targeted at education, and for an average middle income family, suggest in this case?
Current balance is about 10-15% of what is required; 8 years remain before college starts; and hence trying to evaluate options on how to catch up over the next 8 years. Please Suggest what can be other options…if any?
No. The interest rate is too high and the growth assumptions are too high as well.
Have 2 kids. One graduated from a private college in 2022, one is about to be a senior at our flagship state school (UMASS Amherst). Both got aid from all of the private colleges they were accepted at that brought the price down to ~30K a year (tuition, room and board), which is not coincidentally, the cost of living on campus at UMASS. The older one was a pretty good student (3.9 GPA) the younger was a solid B student, but neither had great scores nor took AP classes or any of that other stuff that competitive family kids do. They played sports but did not have any other extracurricular activities or volunteer work to speak of. Now, they were not applying to Harvard or MIT, but to private schools more in their wheel house – there is somewhere for everyone. I just figured that the private schools lower the price to that of state school because they realize that students will go to the state school if the price of private is not competitive. Also, I am a single mom by choice (no dad or $ from anyone but me) and live just outside of Boston in a very HCOL area and I managed to save enough in 529s to put both through college on my own. Am an academic (now retired) and never made more than 140K a year, so it is doable!
Hi Monica, congrats for putting two kids through college! On a single income nonetheless. That is wonderful and you should be really proud of your work as a parent and as an employee. No easy feat.
You are right about colleges pricing competitively to attract students. At the end of the day, they have expenses to pay for, and a budget to follow. A lot of the second to your private universities, will cut tuition to attract students as it is highly competitive on their end, as well to attract students.
I am planning for the worst case scenario, but hoping for the best. Thank you for sharing your story!
Our family is in the thick of it, with one recent college grad (Class of 2023) and one heading off for her first year of college this fall. Most importantly, almost no one, including wealthy families, pays full price for college (unless you foolishly think state unis are the most cost-effective route). I highly suggest attending college financial aid nights at your local high school, doing a little googling, or consulting with a private college advisor. The first thing they will explain is that when it comes to financial aid, you are generally looking for schools that offer “need-based” (state schools and the Ivys) or “merit-based” (most other private colleges/universities) aid based on your income and assets. For example, our incoming college freshman applied to about 10 colleges and received merit scholarships and grant offers at every school she applied to (including our state flagship uni). She had a 3.9 GPA and a 32 ACT score (respectable, but not outstanding). She had only taken a handful of APs, in English and Art. She ended up choosing a small private liberal arts college in Oregon that has a sticker price of about $70K/year. After over $40k in scholarships and grants and $5500 in federal student loans (that she is responsible for), we will be out of pocket approximately $22K for her first year, only $5K more per year than the state university down the street. She is likely to qualify for more aid next year as our income has decreased. This situation is in no way an isolated event. Our daughter who just graduated from MIT last year, was offered generous need-based aid (their income limits are higher than you would expect) and we paid less than $60K for all 4 years! MIT was even less expensive than sending her to a state school and making her live at home! She of course, had a much higher GPA (4.3 with lots of math/physics APs and a 1530 SAT and 35 ACT), but that was only good enough to get waitlisted at Davis and rejected at both UCLA and Berkeley!! So it’s kind of a crapshoot! Encourage your kids to think outside the box from the state schools and the most elite universities that you will be forced to pay full ticket price for (if you do not demonstrate any need). There are many well-respected colleges and universities where your kids can get a good education and you won’t have to sacrifice for years to pay for them. Think smarter, not harder.
“ our incoming college freshman applied to about 10 colleges and received merit scholarships and grant offers at every school she applied to (including our state flagship uni)”
Impressive! $22,000 for the first year in Oregon it’s not bad. But does she not get $40,000 a year for the four years she is there? If not, then $70,000 a year is a lot of money for the remaining three years.
On having a kid who is smart enough to get into MIT, unfortunately, that’s unlikely to happen for us. The acceptance rate is in the single digits, so I want to be realistic about my kids’ chances.
Parents should aggressively save for college, precisely because their kids will unlikely be able to get into these top schools with large grants. It’s dangerous to think otherwise.
What is your MIT graduate daughter doing for work now?
Parents should wonder whether all that effort getting into college is going to pay off or not. Will their children just end up working in tech, finance, or consulting, for the money or because they enjoy it.
Thx for more color!
PS I have listened to and read books and articles about paying for college. As well as interviewing someone about college admissions on my podcast. And I will continue to maintain my conservative stance and expect no help. This is the way I have approached, building wealth, and it has helped greatly.
Dang! I should have clarified that my incoming freshman’s scholarships/grants are renewable for all 4 years. As long as she passes all her classes and stays on track for graduation, her first year will likely be our most expensive at about $22K out of pocket. Another point I would like to make – we are much better off financially now than we were 25 years ago when we started having kids. This is the case for many young (and not so young) couples. We made a lot of sacrifices, but college savings plans were not a realistic option. Thankfully we are in a much better place now and can afford to pay for college out of our income, but we shopped around to get a good college fix that was within our budget.
I disagree that, “Parents should aggressively save for college, precisely because their kids will unlikely be able to get into these top schools with large grants.” My whole point is that it’s not just top schools that offer large grants! There are a lot of private colleges that offer generous merit aid to many students, and not just the top of the class (my incoming freshman for one). Check out the book Colleges that Change Lives. They’re even on a tour this summer to spread the word. Maybe you can get an interview? https://ctcl.org/san-francisco-ca-july-2024/
Don’t discount your kids just yet! My daughter (the MIT grad) would have never applied if I hadn’t encouraged her to pick one real reach school. She was as surprised as anyone to get accepted (almost as surprised as she was to get waitlisted at Davis). She got a computer science degree, with a minor in design so yes, she got a well paying job after graduation. Was it worth it? Financially yes, but she’ll be the first to say college kinda sucked. Not only was her major tough, but she was in her 1st year when Covid derailed things for the next 2 years so it was not a typical college experience. She couldn’t wait to be done.
Sounds good. Hope for the best, expect the worst.
My concern also is that they go to college and end up working a soul-sucking job or have no job.
My plan is to build them a $1 million net worth each by 20 to give them options, without telling them.
See: How To Become A Millionaire By 20
Hi Sam, Stop the 529 money with limits. Save money to help child purchase a house, start a business and take on-line courses. Take a look at college websites the change from on campus to on line has occurred. Virginia Tech and George Mason masters in business & tech ALL online based on niece and nephew completing masters degrees. Look at SUNY and CSU cheap and on line. In the future all college dorms will be for assisted living and the reason for other college buildings will be a mystery. Library & Stadium ????
What you suggest makes sense. The sad thing is, most American parents won’t read this, and therefore, probably won’t even save in a 529 plan for college. And then, when their children grow up, they will be saddled with student loan debt, and struggle to get ahead financially.
Then the cycle repeats over and over again. For those who pay attention and really care about their personal finances , they will grow their wealth to all-time highs as compared to those who don’t even bother and then languish.
Higher education is a sham. I graduated from Vanderbilt University and then went to a private law school. While absolutely essential to my career path, the best education I’ve received came from self-directed reading and YouTube (both of which are much less expensive)! Not to mention that schools are designed to churn out financially illiterate wage slaves. It’s a necessary evil I’m saving for, but I plan to round out my kids’ education with my own curriculum!
“ While absolutely essential to my career path”
This kind of contradicts your view that higher education is a scam, no?
I’m a lawyer. No way around it. But for most jobs, is higher education really going to be relevant in the future?
Hi Sam,
Have you considered private elementary/high schools for your children instead of public schools. We have concluded that going this route will most likely give them a better education, allow them to participate and develop their interests in sports, outdoor education, the arts or whatever they are interested in. We believe this will allow them to develop into a well rounded person, allow them to be happy in their high schools years and with good results and a strong college counseling program a better chance to get into the school of their choice.
I have. We highly value learning a second language, so we are going the Mandarin immersion route for the first nine years.
Learning a language on your own and speaking to them in it is a lot cheaper. That’s what we’ve done and are doing.
Sounds good. I already speak Mandarin since I was a kid, so I’m speaking to them in Mandarin and getting them formal Mandarin instruction as well. I have the funds, so why not. We’re probably gonna go to Taiwan for one month next year as well and do that every single year for a while.
Hi Sam,
What would you suggest for someone who needs to save for college and K-12 at the same time? We live in California and can’t use 529 funds for K-12. My (3) kids are in a great elementary school, but will likely go to private school for Middle and High School – I believe teen years are more critical to personal development than even college, so I want to make sure they are in a good school with limited bullying or violence that can be around public Middle/High schools in my area.
I just finished paying about $2k/month for pre-school, so I feel I have more room to contribute to 529 and Middle/High school funds, but I would have to divide the investment amount every month.
Any suggestions on how to do this?
Thank you.
The S&P 500 index is the easiest and lowest cost way to go in my opinion.
Why, there are so many countries with same education, for example Balkans – East Europe.
Here the expenses for education per year are several times cheaper.
(Paid Education is around $ 300 for 1 semester (2 semesters = 1 year))
Bed + utilities 400 $ /1m
Daily expenses – around $ 50 / 1m
Clothes etc – $ 200 / 1m
Phone, internet etc – $50 / 1m
total: around $700 / 1m
Lets make it $ 1000 / 1m (with backup) => $12000 per year / $ 48 000 per 4 years.
Do you think isn’t it better to live in East Europe, learn in East Europe, and travel everywhere, or to live in USA and become debtor of a banks’ system?
Could be good. I’m just not aware of the economic progress or career opportunities coming out of the region. No family or friends there either.
Is this what you have done? Love some more color on career and entrepreneurial opportunities afterward.
A 2024 Brookings report suggests that the costs you use here are roughly quadruple the actual prices paid for both public & private schools in 2020, even for household with $250k income. https://www.brookings.edu/articles/ignore-the-sticker-price-how-have-college-prices-really-changed/.
I’d argue you are going to be dramatically over-saving bad on your hypothetical costs.
Maybe! And I hope so. I find the 529 plan to be one of the best tax-efficient generational wealth transfer tools that ensures a focus on education in the future.
At least I won’t be in mindlessly contributing to my plans forever after figure out when to stop contributing in this post.
I think parents can plan for their children to be smart and get free money for college and all that. But I think parents also need to expect to be surprised on the upside in terms of cost if they do.
How are you saving for your children and how much do plan to say for them for college?
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Plus if not enough people going to colleges, maybe employers may not require a college degree to do the work. They have to solve the problem of getting enough people to work before screening out the majority. Or they could import immigrants etc. No decent country would charge an average house annual income for a kid to go to college, only US does. And these days I am not seeing the price paying off, those new grads from even decent state or ivy league schools are not really helping the US make better products or doing things that drastically benefit the society like the previous generations. They would get some work done initially and hopefully utilize the “leadership” skills to get out of the frontline work to become “managers/leaders” so they could sit in the meetings all day with fancy clothes.
I was hoping to work until the kid goes to college. So if he goes (not a private one unless scholarships), my current income would cover everything since we already have a 7-figure portfolio and a paid off house. Those college years I may not save as much but just pay upfront. The money now saved would go to my roth, 401k and taxable accounts, mostly index funds with smaller amount of treasury bonds and high interest money market. Would that sound reasonable? Plus I don’t see how average American going to college anymore if the current tuition hikes continues. Unless for a STEM or business degree, there is not much point in paying colleges to learn for example, literature, psychology, etc. You could basically read books and watch youtube and learn more. I guess you pay to be with fancier peers (connections), or a prerequisite degree to go into professional schools later. Or try to study in Europe or Asian colleges for lower tuitions. I don’t know. College cost in the US these days is just crazy and not sustainable.
Have you considered college tuition being a bubble that will inevitably burst due to the current economic backdrop we will have in the next 10-20 years? Incomes aren’t keeping up or even remotely growing at the pace of inflation. Do you think that’s going to change? Other experts believe college tuition is going to have a massive deflationary event in the near future.
Absolutely. I’ve been thinking college has been an in a bubble for the past 15 years since I started Financial Samurai, and tuition keeps going up faster than inflation and acceptance rates keep getting smaller.
Colleges know parents will do anything for their children, which is why there is so much price inelasticity with college tuition. From social pressure to fear of their children not being able to launch as adults, parents are stuck in a hard place.
So my plan is to teach my children everything I know about math, English, Mandarin, business, marketing, communications, writing, speaking, business development, sports, etc to try to lower the cost of their education. Why not right? We parents have a lot of knowledge. We might as well try to transfer as much as possible to them.
With a 529 plan, you can just keep rolling over the beneficiary. So in a big way, a 529 plan is like a generational wealth transfer tool.
Feel free to share how you are planning to save and pay for college.
Good luck passing the knowledge to your kids! We are well educated but the kid rather learns from the school or afterschool than directly from us, especially when we try to formally teach him stuff. If it is indirect teaching, he is more open to it. Mom and dad are not teachers/instructors. We realize it is better to show him general values and good habits, and the detailed skills could be learned more effectively from schools, camps, libraries, youtube, etc. We are lucky to have a wonderful and affordable bilingual afterschool/camp program in a very good school district that the kid goes to year round, so we don’t have to worry about teaching the kid math, reading, writing, second language (Chinese), STEM, etc.
Thanks. We were highly effective when we homeschooled him for 18 months. And so far, it’s been affective with tutoring him in the evenings and on the weekends.
Maybe it’s because we are both stay at home parents but he is used tomorrow instruction from us?
Or maybe it’s because I’ve been a personal finance educator since 2009, wrote a book they can actually hold and read, and a high school tennis coach for three years, that they are more willing to listen to me. I think it does help to walk the walk to gain credibility with the youth.
What is it that you do? We’re you working or a stay at home parent when your kids were under 10?
I have a similar philosophy on 529 funding. I’m still contributing to my middle schooler’s account, which is approaching fully funded for any school. My parents paid for my education without qualification, so I feel obligated to pay it forward. I want to be retired by the time my kids are in college, so I hope to avoid cash flowing any of it. We can always roll any excess over to a younger sibling or the next generation or take advantage of the Roth conversion. I’ve avoided the generic age-based funds in favor of a static 90/10, and the growth has been solid.
Great article. Vanguard beat you to the punch. Everyone with kids who are planning for college should have this bookmarked on their computer.
https://vanguardcollege.ssnc.cloud/csp.php
My son is about to start at UNR. We’re Nevada residents but I just learned that UNR has a Western States Tuition Rate of only about $13,750 a year, which is a bargain and cheaper than California states – and Reno is only like a 4 hour drive from San Francisco.
Add books, room & board, and personal expenses and you’re looking at ~$40,000 a year for UNR.
Ah I love how your brain works. This logic makes a lot of sense. And I love the tangible aspect of the numbers. Very practical! The costs of higher education are atrocious. I can’t believe my own in-state tuition costs were so small in comparison to what kids today will be paying for when they graduate high school. Your kids are lucky you were able to superfund early on and have built up a solid plan. Starting early really is the key. Even if you can’t contribute a lot, starting early and letting compounding performance returns grow your contributions over time makes such a big difference. Fantastic article, thank you!
$100k each child by 9 years old and I’m done.
Cool. Can you share the thought process behind that? How old are your kids?
My kids are 5 and 9. By 9 for each kid, I will have contributed $100k to each. I feel that is enough money to cushion us if they go to school and not overpaying should they go another route. Additionally, I’m not sure what additional funds we will have due to inheritance and career opportunities so this number just feels right.
In addition, I’m putting $7k in each kids newly created Roth as I’m having a good year as a CRE broker here in So Cal.
I also send my kids to language immersion. My oldest started at 2.5 years and is now going into 4th grade. It’s been amazing to see them learn mandarin and Spanish in a very competitive/challenging arena while thriving and also being street smart and good with people. They are going far better than their surf bum/disliking school dad. Thank goodness.
On the Roth IRA, what type of earned income are they generating to make $7K a year each? I’m looking for ideas! Thx
I just do what my accountant says I can. This will be my first year as I need additional write offs so having my kids as employees is helpful. I wish I had your type of granular thinking but my time is better spent being busy and getting stuff done. I’m fully time 1099 CRE broker who has an S-Corp. My wife is full time W2 Income in Fortune 500 sales. We have a rental property and a single unit Franchise (S-Corp) that kicks off about $75K of fairly passive income. Our tax system is way too complicated. My accountant says the tax system really favors RE and business ownership which we play in both.
Your kids must be geniuses to be able to pull that kind of income to fund a Roth IRA. I laugh so hard anytime I read about a parent doing this. the IRS will butcher you if they find out about your fraud.
Starting this year, 529 plans can also be used to rollover to a Roth IRA for the designated beneficiary (which can keep changing) to a maximum of $35k. Shouldn’t this be considered too?
Sure, it’s mentioned in the post. What is the consideration you’d like to share? Thanks
My husband and I decided at the start of our college saving for our 2 kids that we would limit the amount we saved to cover for public school tuition. We don’t see the value in paying for a private school for an undergraduate degree, even if we can afford to – don’t want to feed into the frenzy. We are both UCLA grads and I went onto a PhD at an Ivy school that was 100% covered by grants. We absolutely don’t want our kids saddled in student loan debt. We did Coverdales in the early years when our income level qualified and took a lot of risk in individual stocks that paid off. We are currently trying to decide when to stop savings for college and put the money towards other investments. We did stop contributing to 529s and shifted to putting money into a Roth IRA so we can use it for our own retirement if we don’t end up spending on our kid’s education. We have it in a separate account so we can keep track of what we earmarked for this purpose.
If they end up starting in a community college that will save a lot of money – but we are not pushing that route. State schools are so competitive now in Cali!
Yeah, that’s the problem with University of California state schools, it’s almost impossible to get in. It’s kind of sad really, especially if you pay 18 years worth of property taxes or more.
I wouldn’t count on your kids getting in just to manage expectations. I don’t expect my kids to get it anywhere, which is why I’m trying to teach them as much as possible, while they are still living with us.
There are also many great Cal State schools that are easier to get into and then if you go the community college route, your chances of getting into a UC doubles. Still can not justify private school costs – will consider out of state and was recently introduced to the Western states discount, so that gave me more hope there could be relatively affordable alternatives.