In keeping with the theme of the day, I’ve been trying to think of scary things. And, as a parent and someone who has more than a passing interest in prudent money management, what could possibly be scarier than the cost of a college education for your kids!
I remember when my daughter was born back in 2000. I had been doing some research on what were the best types of accounts to use for college savings. I came across an article in Money magazine that said something to the effect of this, “If you want to make sure you have enough money to put your child through an expensive college, then you should open up an account when they are born with $500 and then contribute an additional $500 per month until they are done with school.” Whoa! I was completely floored.
At that time, I had just graduated from business school, my wife had just quit her job and we had just purchased the most expensive home we had ever lived in. Needless to say, money was tight.
There was no way we could follow the recommended advice. $500 per month? $6,000 per year? It was unimaginable. I did take one piece of advice though, I did open an account that month with $500 in a 529 savings account. I also starting putting money in it monthly. It wasn’t $500 though, it was $25. But, at least it was something.
I would take up the monthly contributions each year, and now we have a decent-sized nest egg for her and for her brother who showed up two years later. If I could leave you with no other piece of advice, I would recommend starting that account the month they are born. Take as much advantage of time as possible.
Cost of College
It is Halloween after all, so get ready to be scared. I pulled some college cost information from CollegeData.com to see what the latest numbers were for the 2016 – 2017 school year. These numbers are their Cost of Attendence (COA) figures and include things like: tuition, books, fees, room, board, transportation, and personal expenses.
It is the “all in” number of what it is going to cost to attend there. One caveat though, many colleges with high COAs will offer generous financial aid packages, so few families will pay the full price, but some do. But, it’s Halloween, so let’s get good and scared!
Here are COAs for a sampling of schools for their 2016 – 2017 school years:
- Cornell University (Ithaca, NY) – $67,613
- Duke University (Durham, NC) – $69,959
- Grinnell College (Grinnell, IA) – $63,438
- Rice University (Houston, TX) – $60,518
- Stanford University (Palo Alto, CA) – $67,291
- Swarthmore College (Swarthmore, PA) – $66,110
Public colleges (for state residents):
- University of Arizona (Tucson) – $28,217
- University of California (Berkeley) – $34,972
- University of Idaho (Moscow) – $20,640
- University of North Carolina (Chapel Hill) – $24,630
- University of Massachusetts (Amherst) – $29,997
- University of Michigan (Ann Arbor) – $28,776
And just to be clear, these numbers are for ONE year. Four years at Duke could run you $280,000. No wonder that Americans don’t have enough money to retire!
How Much to Save
There are plenty of strategies to save on the cost of college. Your child could live at home and go to a community college for two years and then transfer. They could skip college and focus on getting a skilled trade perhaps. They could pick a college where they are well above the average academically and hopefully get some scholarship money. All of these options are reasonable.
But let’s assume, just for fun, that you want your kids to go for four years to a private school. How much would you have to save? Using Vanguard’s College Savings Planner (which is super cool, by the way) let’s see what it would cost to go to Duke and how much you would have to save:
- One year at Duke today costs $69,959. With annual 5% cost increases, in 18 years, it would cost $725,673 to attend for four years. In order to fund that 100% yourself, you would need to save $1,519 per month every year though the end of college. That’s $18,228 a year, every year, for 22 years. Whoa.
How about a cheaper option, University of North Carolina, perhaps?
- One year at UNC Chapel-Hill today costs $24,630. With annual 5% cost increases, in 18 years it would cost $255,483 to attend for four years. In order to fund that 100% yourself, you would need to save $535 per month every year through the end of college. That’s $6,420 a year, every year, for 22 years. Better, but still – whoa!
There go your plans for early retirement.
Best Account for College Savings
I don’t know anybody who is saving that kind of money, but most people I know are saving something. So, where do you put the money you are able to save? Most experts will tell you that putting your savings into one of the many state sponsored 529 college savings accounts is the way to go.
In Pennsylvania, your contributions are even deductible on your state taxes. You can even contribute to state plans outside of Pennsylvania and still deduct your contributions. Check with your state on options.
If you do have options, I have my plans with Utah’s 529 plan. It has consistently been ranked as one of the best run plans in the country and their funds are all managed by Vanguard, where I have all of my retirement accounts.
Benefits of a 529 Account
- Earnings in your 529 accounts are not taxable when used for qualified educational expenses.
- Some states may also offer tax breaks on earnings or contributions.
- Unlike custodial accounts, 529 accounts are completely controlled by the account owner, not the beneficiary, so you can make sure the funds are used for their intended purpose.
- The 529 account owner can withdraw the funds at any time and for any reason. However, if it is not for a qualified educational expense, then you will have to pay income tax on the earnings and an extra 10% penalty on the earnings as well.
- The plans are easy to setup with automatic investments connected to your paycheck or checking account.
If you’re just getting started and your kids are young, then here’s my advice. Open up a 529 account early and start monthly savings with whatever you can afford. Time is on your side. Even $25 a month adds up over time and each year you can try to increase your contribution a little bit.
If your kids are a little older, then time may not be your friend. You’ll need to contribute quite a bit more than $25 per month to have anything meaningful built up in time. You may want to play around with Vanguard’s College Savings Planner to help you figure out how much you should be putting away.
If the cost of putting your little ones through college doesn’t scare the pants off you, then I don’t know what will. The zombie apocalypse ain’t got nothing on soaring tuition bills! Happy Halloween!
If you have kids, have you already started saving for their college? At what age did you start? Are you using a 529 plan?