College will likely cost between $60K and 100K a year in the next 20 years. This is based on the projected 3% yearly increase from the current average cost of $25K for public universities and $40K for private universities. The cost would increase to $240k and $400K respectively for a public and private college education. The thought of putting up to $400K in a 529 account when the future is unknown is just too risky for me. This is a huge sacrifice to make.
Let’s look at what it would look like. In order to reach a goal of $400K in 18 years with a modest return of 7%. You would need to invest about $950 a month into stocks for 18 years. For some that’s rent or a mortgage and for others that’s a car note or two. We are talking about serious money here with the risk of your child choosing not to attend college at all or not needing the 529 account due to acquiring enough scholarships and grants. What if the rate of college cost doesn’t increase by 3% a year like it has in the past and in fact only increases by 1.5%. What if a portion of the college education and maybe even the entire 4 years of education becomes free in 20 years. The possibilities are endless especially when tuition free colleges are already a reality for 20 states. These programs are called promise programs and typically offer college students two years of free tuition at participating state community colleges or other associate-degree programs and vocational schools. Eleven states already have these programs in place and nine more are working on legislation to do so. In 2017, New York’s Excelsior Scholarship became the first in the nation to cover four years of tuition without being tethered to academic performance.
This is enough for me to feel uncomfortable saving $400,000 in a 529 account. But if you look deeper into these programs what you realize is that in order to qualify for these programs the parents of the children either have to earn a salary of less than six figures a year or live in a school district where the average salary is less than six figures a year. So if you are someone who has stealth wealth, then your child may be able to qualify for some of these programs in the future, if not then putting aside $1000 a month would be best if private school is a must. This forces the high income earners to live more within their means and to use their high income more prudently. The problem with this is that a lot of high earners are living paycheck to paycheck just like the lower middle class and lower salary earners. This may lead to a lot of high income earners raiding their 401K’s and being underprepared for retirement.
Now if you need to save $400K for college I think there is a better way to lower your risk in case an unexpected outcome occurs by dividing the amount in different accounts. You could put some into a 529 account, some into a custodial account, some into a Roth IRA when your child has earned income and some into a savings account or CD.
Now don’t get me wrong. I am still a huge fan of the 529 account because of it’s triple tax benefit, which, however is state specific. You get to deduct your 529 contributions from your taxes in most states, the money is invested in stocks and produces capital gains. When you sell the stocks you pay no capital gains tax and when you spend the money on items for school including tuition, books, electronics and housing you don’t pay any sales taxes on the money spent. I still believe the majority or at least half of the money for college should be saved in a 529 account, especially if you get the triple tax benefit.