For 529 plans, when is enough, enough?
December 31, 2012 7:55 AM   Subscribe

I've been saving big into a college fund since my child was born 8 years ago, on the order of $900 per month. I recently checked the 529 plan that was receiving the funds and it is currently at $90k. There is still a decade before the child would enter college, and by most estimates that could mean a doubling and a bit more if market averages do ok. My investment guy says a kid in the year 2022 might need $300k for tuition at a prestigious college and that I should continue. I think I'm pretty well set for now and it could be around $200k by then with no added input. Should I continue putting money away in this account or should I divert that into my own retirement (which is doing well too, but could always be better)? Or contribute less? When is enough enough for college?
posted by anonymous to Work & Money (22 answers total) 3 users marked this as a favorite
Hard to get loans and financial aid for retirement. I'd head there, or even think about another investment.
posted by the young rope-rider at 7:58 AM on December 31, 2012 [18 favorites]

I agree with the young rope-rider. If you can continue to put a small amount in a college savings fund for your child - $200/month? - that would probably suffice. The biggest asset you have when starting a college savings fund is time and with another decade to go, I think you're in great shape.
posted by kat518 at 8:05 AM on December 31, 2012 [3 favorites]

I agree with the young rope rider. If you really want to continue, how about split the difference or even less -- $300 to college, $600 to retirement.
posted by amanda at 8:09 AM on December 31, 2012

Your investment has had a return of $3,600 over 8 years. I can't see how you'll reach your goal at that rate.
posted by Yowser at 8:11 AM on December 31, 2012

My investment guy says a kid in the year 2022 might need $300k for tuition at a prestigious college and that I should continue.

Your investment guy may be able to look at a graph, but if college tuition at the upper end continues along that trend line for the next decade, broader economic repercussions kick in to suggest that you should be putting your money somewhere else.
posted by holgate at 8:11 AM on December 31, 2012 [25 favorites]

You are also assuming that you'll be paying retail for a private school education. That may or may not be a good assumption and it is definitely wise to plan for the worst case. However, if your future college student can't get some assistance to attend a $300K school then you should probably be looking at lower cost options anyway.

I think $180K in 10 years is more than enough to fund one 4 year degree.

Meanwhile you aren't getting any younger...
posted by COD at 8:18 AM on December 31, 2012 [2 favorites]

Most of the talking heads say you should fund your retirement before funding a child's college. That you should target 20% of your income to be saved for retirement. Their reasoning is a bit harsh, they say a small local school will be just as good, or that with the changing financial aid picture the child may be able to qualify for more aid if he has less, and that it really isn't your responsibility to pay for their college. That being said you have three other people that could contribute to the 529 plan...grandparents!
posted by Gungho at 8:21 AM on December 31, 2012

Retirement. If a kid wants to go to college there are lots of ways to finance it. Loans, grants, scholarships. I had a 529 plan and my kid only did community college, even though I had enough invested for a full in state ride. Put a bit in the 529 then invest the rest in yourself.
posted by PJMoore at 8:22 AM on December 31, 2012 [3 favorites]

I went to school with $0 in savings, and managed a decent scholarship to a good state university (UMass). 9 years later, I paid off my loans; it cost far less than $90k, and even adjusting for inflation, that holds true. Being able to pay back loans is an amazing leg up, but $300k is a LOT more than someone can reasonable expect to just be handed -- assume that a kid who is able to make it to a prestigious university can get scholarships, grants, and private loans, and then pay them back as needed.

I would strongly encourage you to redirect your savings to a retirement fund and/or a general savings fund.
posted by ellF at 8:28 AM on December 31, 2012 [3 favorites]

The conventional wisdom is that, at the very least, you should be maxing out your retirement plan before putting money in the 529. I'm going to assume you're doing that and that when you say "it could always be better" you mean that you could be saving more money above and beyond your 401k or whatever you have.

I think you have to think about this probabilistically. Your kid might go to a four-year private university, or they might go to State, or they might choose to do something else with life (lots of people think that even 10 years from now there will be more non-college routes into the workforce than there are now) or they might win a big scholarship or.... well, there are lots of possibilities. If you aim to have the maximum you might possibly need in the account (say $300K) and you end up needing less money for tuition, you pay a big penalty on the remainder of the money when you withdraw it.

So I don't think you ought to aim for that maximum -- rather, shoot for an amount which will put you in very good position to afford the remaining amount if your kid does go to an expensive school, but which doesn't drastically overshoot if something else happens. If you think you're going to have $200K in there 10 years from now, my intuition is to say that's about right.

On the other hand: is this going to be your only child? Because you can use money from one kid's 529 to pay for your other kid's college. It works for nieces and nephews, too. So having too much money in there might not be as big a problem as it initially appears.
posted by escabeche at 8:29 AM on December 31, 2012

As I understand things the 10% penalty is just on the early withdrawal of the earnings, not the early withdrawal of your contributions - it also does not apply when/if your child gets a scholarship. Say you have earned 100k over the years until school and your child does not need the money - you would only lose 10k in penalty if you couldn't find a way to spend the money...

You have enough money now for 1.5 years at current rates. College costs have increased at inflation+ in recent if you manage to earn inflation+ each year (5%?) you will only have the ability to pay for 1.5 years when your child is ready for school.

If you are comfortable with your retirement savings and don't have any debt issues, then 90k really isn't very much money to have saved for college. Also you might want to talk to someone who had children starting college in 2009 or 2010. I know lots of smart people who saw 401k funds and 529 funds drop significantly over this period.
posted by NoDef at 9:04 AM on December 31, 2012

My parents saved/budgeted enough to put me through the flagship state school with no loans if I worked. I went to a private school, and got enough in scholarship money to only need a relatively modest amount in loans beyond my parents' help, graduating in 2010.

I think that was a very kind and fair offer from them, and your kid needn't ask for more from you unless you are remarkably wealthy or your state's schools are truly awful.

Note that the most elite colleges have extremely large endowments and offer very generous financial aid. If your kid is able to get in there, the cost will probably not be an issue. High costs can come up, instead, at the medium-prestigious schools trying to bootstrap themselves into high prestige via student tuition. NYU is perhaps the canonical example. Many of these medium-prestigious schools will at the same time offer large aid packages to strong students in order to boost their admissions figures.

PS: Is your "investment guy" a fee-only financial planner, or does he make money off of the commissions and fees on your investments? You're saving enough money that higher-fee investments can make for a difference of hundreds of thousands of dollars over the course of your life.
posted by akgerber at 9:07 AM on December 31, 2012 [1 favorite]

It may be hard to give great advice without knowing what percentage if your monthly income 900 is. If it is 20%, you might consider shifting some to retirement or savings (certainly to debt, if you have any).
If it is 5% you might just keep going.
posted by jander03 at 9:24 AM on December 31, 2012

I should also note that my in-laws have retired with enough to continue to help my sister-in-law get through graduate school without worry about the cost (her academic and personal achievements play a large part in that as well) and they've offered to help with certain costs for our son. Something else to think about in terms of retirement.
posted by the young rope-rider at 9:24 AM on December 31, 2012

When I first went to college 10 years ago, tuition was ~$40,000 a year at a small liberal arts college (equivalent to most top schools). Now, going back to finish my BA, it's ~$50,000.

At my original school, I had ~$10,000 aid per year from a college fund, and with a grant and scholarship, there was about $8000 left per year to pay out of pocket. My parents covered this from their savings; we didn't take out loans.

If right now it costs about $200,000 for 4 years of college; I would estimate that in 10 more years it'll be ~250,000. If you have half of that amount in a college fund going into things, you'll be pretty well set. I would put the majority of the $ into your retirement.
posted by DoubleLune at 9:30 AM on December 31, 2012

Check out point #7 on this Vanguard 529 information page. It says there's no 10% penalty but rather you you only have to pay the tax you didn't pay on the earnings, and furthermore unused funds can be used by other family members. Maybe useful for you to know, but that's not to say you shouldn't max out your retirement savings. Just depends on how much money you have available for both purposes. You should also consider whether the 529 funds are in managed funds or passive (index) funds. If the former, you may be paying unnecessarily high fees. I chose Kansas (managed by LearningQuest) for my daughter's 529 fund because it allowed me to invest in very low fee Vanguard index funds.
posted by Dansaman at 9:45 AM on December 31, 2012

This site seems to be pushing for life insurance instead of a 529 fund. But they do raise some valid points.

According to the Internal Revenue Service, money in a 529 college savings plan can only be used for "qualified education expenses" including tuition, fees, books, and room and board at an accredited U.S. school. Should your child opt out of college, choose a foreign or unaccredited school or receive a full scholarship, you can transfer 529 funds to another beneficiary or pull the funds out and pay income tax on the withdrawal. You may also have to back taxes if you've taken state tax deductions over the years as well as a 10 percent penalty on earnings.
posted by JujuB at 10:08 AM on December 31, 2012

Mod note: From the OP:
Thanks for all the great advice! To clear some things up, the $900 used to be about 15% of my income, it's just below 10% of it now. I've been maxing out my 401k options during these years but a few years I did some after-taxes retirement contributions as well, and that's where some of this money would go. It is an only child and I do have nieces and nephews I could divert some extra funds to, but they are slightly older so it might not help as much (I also set up smaller 529 funds for them a few Christmases ago as a gift, the accounts are in the $5k-10k range for each relative). Most everything is in index funds and fees for transactions are kept low. The 529 went through the horrible 2007-2009 period and lost some value, which is why it's only up a little bit since inception beyond contributions.
posted by mathowie (staff) at 11:07 AM on December 31, 2012

If you want your child to go to a prestigious private school and you'd rather them not have to take out loans, I'd keep contributing. Ivy league schools (for example) don't give out merit based scholarships, and though many are generous with financial aid, I'm not sure you'd qualify given your income level.
posted by kylej at 1:17 PM on December 31, 2012

The FIRST place to fund is your Roth. God forbid you should have to, but if you needed to you could always tap the principal in the roth at no tax consequence to assist with the education if you want to...

Next, you MUST be on track for your retirement. You can borrow to fund an education, but you can NOT borrow to fund retirement. You do not want to be a burden your kid in retirement.

Depending on your investments in the 529, you can reasonably hope for about 4% return above inflation rate, which applied to the 90k will end up being about $150k in todays dollars. If you can put a bit more in between now and college, definitely go for it. But, if you run out of money in retirement you will screw yourself, and very likely screw your kid too (depending on whether or not they would help you if you were in dire straits as a senior)

There are many options for education - working, scholarships, cheaper schools, alternative educations, etc. There are no attractive options for being destitute and being unable to work because you are too old or have lost your health.
posted by jcworth at 6:57 PM on December 31, 2012 [1 favorite]

This is ontopic if you believe inflation can go > 4%

If when the rate of inflation goes up the value of the investment will go down.

If when the rate of inflation goes up enough to cover the national debt the value of the investment will soon become worthless.

I say when rather than if because the plan everyone is expecting is to inflate away debt - that's from everyone from the Bloomsberg channel yesterday to disaster scenario folk who've been saying this for decades.

I can't standby and watch you robbed blind like this so I would at the least say,

keep at least just a little bit in a form that won't be going to be destroyed by inflation and bankruptcies.

- jago25_98
posted by jago25_98 at 11:08 AM on January 1, 2013

anon: "My investment guy says a kid in the year 2022 might need $300k for tuition at a prestigious college and that I should continue."

Your investment guy is full of shit. He's looking at a projection of tuition rates over the past ten years and looking forward. Well, as they say, past performance is not indicative of future results. Tuition is climbing at state schools because of declining state funding. I just looked up my employer's publication stats and the numbers are clear: state funding has declined from 50 percent to 20 percent over the past 12 years. At this pace, we'll be out of state funding entirely before 2022, and there is a threshold above which the costs of compliance with various state regulations exceed the benefits of being a public unit, shortening the timer before state schools go private.

Private schools don't have these problems directly, but they did have a bad time in endowments (hint: private equity holdings may be obscuring just how bad the damage is), and state schools raising tuition gives them room to follow suit. The reality is that it looks worse than it is because they've been raising sticker prices and awarding financial aid liberally in an effort to charge the well heeled more.

anon: "The 529 went through the horrible 2007-2009 period and lost some value, which is why it's only up a little bit since inception beyond contributions."

That's only 2 years of roughly break even performance. Where'd the rest go?
posted by pwnguin at 7:15 PM on January 1, 2013 [1 favorite]

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