Saving for College (Photo credit: Tax Credits)
The perfect is the enemy of the good. For a long time, the perfect kept me from opening a 529 account. I struggled with my reservations and uncertainties about making that type of commitment. College for my children seems so far away and 529 Plan was far, far down my list of financial imperatives. Still, the decision to start an account haunted me. I knew I was letting the perfect prevent me from making a good financial decision.
In my countless hours of debate over opening an account I came to a conclusion. If you are a parent, you should open a 529 plan for your children; period. I know that parents struggle with the wisdom in starting these plans, which is why I’m here to explain why you don’t have to worry.
Any parent wrestling over the merits of opening a 529 Plan has three basic concerns:
- What if my child doesn’t go to college, I’d be wasting money.
- Won’t I be robbing my own retirement by giving a large chunk of savings to my children?
- Saving too much could cost me in the end, it’s impossible to know how much to save.
While each of these considerations are important, they should not be deal breakers, nor should they prevent you from opening an account.
Odds are, Your Kid is Going to College
Of course not every child is going to attend college, but your child probably will. In fact, 3 out of 4 young adults complete at least some college. The odds only increase with your personal level of college completion. If you’ve graduated college, your children have an 87 percent chance of attending college. My wife and I have graduate degrees, our children have a 93 percent chance of heading to school.
Just to give you some perspective, your child is more likely to go to college than get married.
Don’t Prevent Others from Giving the Gift of College Savings
You aren’t the only person with an interest in sending your child to college. Grandparents, aunts, uncles and even your children have an interest in saving. Most 529 plans allow anyone to send contributions, which means you aren’t on your own. Even if you fear making your own contributions will put your retirement at risk, opening an account allows others to gift money over the years.
People can’t contribute if you never open an account.
You Probably Couldn’t Save Enough If You Tried
In an article I wrote for US News and World Report, I made an attempt at estimating the cost of college in 2030. Based on current tuition growth rates and assuming parents cover only 45 percent of the tuition bill, you’d need to save at least $100,000 per child. To meet this goal, you’d need to save roughly $215 a month. This is with your child receiving some financial aid and taking out nearly $80,000 in student loans.
The simple fact is that if college costs continue to grow at current rates, you’d have trouble saving too much money. Don’t let the magical final number get in your way of starting a 529 Plan.
Perhaps the perfect plan is to put away $300 a month to cover all of your kid’s college expenses. Maybe, perfect isn’t saving anything for your children. It doesn’t matter what the perfect plan could be. What matters is that opening a 529 plan is a good decision for your children’s financial future. Don’t let perfect get in your way.
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I’ll be interested to see if your projections hold true. If they do, then we’re going to face some serious problems as a country as our younger generations will be buried in debt before they’re 22 years old.
529s are a great plan and even if you don’t contribute to them, I plan on asking every family member to donate each birthday/Christmas that my (eventual) children have.
You got ahead of me a bit on the b-day and christmas gifting. However, there are lots of ways to start saving that aren’t necessarily putting your own savings at risk. However, you’ll never put any money away if you don’t open an account.
We all, it should seem, would want our kids to start their grown-up life without unnecessary burdens. By saving through a 529, you’re giving them a chance to go to school without dealing with an aftermath of loans that could haunt their finances for years – even decades.
It would be interesting to study if parents that aid kids to pay for school save money in the long run by not having children boomerang home after they graduate.
I think that these are all good points, but I’m not convinced that it’s necessary to pay for your kids’ education. I paid for my whole education by myself (with the help of some very minor loans) and it taught me a great work ethic, a lot about money, and gave me experience with which to get a job after college, too. Sure, it was hard, but I did it and I’m proud that I did. But I do think that if you can afford it – why not?
Great point Daisy!
The “should parents help” question is definitely one that parents struggle with. However, keep in mind that a parent often only needs to contribute $25 to open and account and by opening, they give children the opportunity to save themselves at any age. My own children can save money in their 529 plan and invest in index funds that are available. I plan on holding a portion of their allowance for the plan; they are welcome to contribute more.
So even if you are going to go the “my kids are on their own route” opening a 529 plan helps give your kids an advantage in saving on their own.
I think this is almost impossible these days. I could see it happening if you went to junior college for 2 years, and then a cheap state school after that but the days of paying for college by yourself are over IMO. The math just doesn’t work out anymore.
Now that I’ve maxed out all my retirement accounts I’ve considered opening a 529 plan even though I don’t have any kids yet. You can transfer them pretty easily but I’m not sold yet. You wrote an article about I bonds the other day, I believe the interest be used to pay for school expenses tax free, don’t remember if you mentioned that or not. They provide a little more flexibility and a decent rate of return. I wouldn’t want to be too risky with a college fund with a less than 20 year time horizon.
I completely disagree. I think there are inherent benefits to doing so, but you would be better served by maxing out your Roth IRA contributions for you and your spouse (if you have one) first. Roth IRA’s can be used for education expenses and eliminate the risk of what happens if you child doesn’t make it to college? This also helps helps you take care of yourself first by ensuring you have the finances to pay for retirement. It’s exactly like the flight attendant says: take care of your own mask and then try to help others. If you don’t take care of your own retirement, your children will inevitably have to help support you down the road. Student loans have lots of ways to reduce or halt payments when in financial distress. Your retirement does not have any ways to increase during times of distress.
Great point Kyle! I’m a big fan of the Roth IRA method to saving.
I think you should still open an account for your children. It doesn’t mean that you need to contribute regularly. This year my kids are getting some 529 plan contribution gifts for Christmas. My kids also put a portion of the money they get from an allowance into the plan. A 529 plan helps others to an outlet for gifting and saving too.