Saving for College

In the US saving for college or University can be expensive. Tuition at a private university can be over $30,000 a year, even in state tuition at a local public university can be $10,000. Add in another $10,000 for room and board, plus another few thousand for books and fees and a few thousand more if you want to do something like engineering and a good private school will set you back $50,000 a year.

The good news is these costs are rising higher than the rate of inflation! Twenty years ago a private school would have set you back maybe $15,000 a year. So for those having children now who wish to go to a good private school then it’s not unreasonable to expect the fees in 18 years to be $100,000!

This is all very daunting so how do we get around this. Firstly as we have reached a point in society where most people are going to university then I think the value of a Bachelors degree has been diluted, so maybe the expensive fancy school for undergraduate is not worth the money. Most large companies especially in the sciences and engineering require Master’s degrees these days so possibly that’s the place where the focus should be in where to spend the money. That’s not to say that high school graduates shouldn’t go to a good school but at least consider the cost of in state tuition against that fancy Ivy League school.

The other thing that is becoming popular is to do the first two years of a four year degree in community college and then transferring to a traditional four year school. Community college is a great deal, usually you can live at home and costs will typically be under $5000 a year. Some states now offer free tuition making the education practically free.

It’s interesting to note different country’s attitudes to university tuition, Scandinavian countries, France, Germany and others all still offer free university to their citizens. When I was an undergrad back in the UK 25 years ago, tuition used to be free then as well. In fact I used to actually get a government stipend each term, so effectively I was being paid to go to University. Things are different there today though.

So assuming that you do have to pay for University then in the US what is the best way of doing this. Most people saving for college for their children should look into a 529 plan. This allows you to contribute as much as you want (up to the normal IRS annual gift amount of $14,000) and then the money grows tax free. Also if you use the money for paying for higher education you don’t have to pay taxes on it when you withdraw it. So it is an account that is very tax efficient. Also if you can set one up under your own state the contributions are excluded from local taxes. This is actually quite hard to do; the one we invest in through Vanguard is sponsored by the State of Nevada although of course we don’t live in Nevada.

Come time to pay the bills you simply pay from the 529 account. In fact most universities will allow you to link your child’s 529 plan directly into the college account so effectively you don’t even see the bills.

We started 529 plans for both our children as soon as they were born and both have now accumulated enough in them that we are confident they can have a good choice in where to go to school if that is the best option for them. My philosophy is very much that possibly local in state college might be perfectly fine, but I want our children to at least have the option of looking elsewhere if it is a good fit. It has allowed us to completely ring-fence off college money form the rest of our assets (in fact when calculating our net worth I exclude the 529 money from it).

The other great thing about 529 plans is that anyone can contribute towards it, so if say Aunts and Uncles want to splurge on their nieces and nephews at Christmas then rather than giving them cash they can put it straight into the children’s college fund.

In terms of actual investments the 529 plans are usually set up like an age based index fund so they are designed to be higher risk investments for younger children then automatically re balancing to less risky options as the child approaches 18.

We currently have a daughter who is a high school freshman so when she starts looking at colleges in a couple of years we know exactly how much money she has to spend, which is a great peace of mind.

 

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2 Comments on "Saving for College"

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Peter Wang
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My daughter is in the EE program at University of Houston, plus she has merit-based scholarships. I pay WAY less than some people pay to send their kids to private K-12 day school! Be careful not to oversave in the 529s, if I had saved more than I did I probably would have a big surplus, which would be hard to repurpose.

Steve
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This topic hits close to home. My oldest is in second year university and the youngest will start next September. In British Columbia for 2017/18 tuition is $6400 per year. We have a similar education savings plan like the 529 called RESPs. It is a small way we can help are kids get a good start in life without a huge debt when they finish school.

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