How to save for your kids’ college education

College education is getting more and more expensive. How can you save enough money for children’s college education? There are many ways to do that. In this article, we will talk about one way to do it: using a 529 plan.

Summary

  • How much will college cost when you kids go to college

  • What is the 529 plan?

  • Benefits of the 529 plan

  • The contribution limit

  • How to use 529 to fund for your kids’ college

  • Other ways to afford college

How much will college cost when you kids go to college

For every saving plan, we should have an end goal. So the first thing we will do is to figure out how much the college is going to cost by the time your kids are going there.


Vanguard provides this free College cost projector. You can enter the following info, then calculate the projected college cost:

  • Years until college

  • Years in college

  • Rate of annual cost increase

  • Current annual college cost


For the current annual cost, by clicking the “look up cost” button, you can then enter the state, then either choose the desired school, or click “show average costs”. We will use Public 4-year school, in-state, including room and board for an example here:


For this specific example, we put 18 years until college and 4 years in college. The calculator told us that today, the college will cost $90,760. In 18 years, the college will cost $235,358.



From the statistics on the statista website, the average number of children under 18 in families with children in the United States in 2020 is 1.93. Let’s round that up to 2. 


With two children, you will need to save up $235,358 * 2 = $470,716 for your children's education. This number is based on the college choice and state we made above. It might vary depending on the state and the specific college your kids will go to. In general, out-of-state college is more expensive than in-state. Private college is more expensive than public college.


Now we will use this number ($470,716) as our target saving amount, and calculate reversely how much we should save every month in order to reach this goal with a 529 plan.

What is the 529 plan?

A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary (Wikipedia). 

Benefits of the 529 plan

Here are the benefits of a 529 plan:

  • Many states offer state income tax deduction or tax credit for the 529 plan contribution

  • Simple to use. When you sign up for the 529 plan, you have the option to sign up for automatic contributions. After that, the investment in the plan will basically go auto-pilot.

  • When your children use the 529 plan for eligible school related expenses, the earnings portion is not subject to income tax.

  • Transferable. You can transfer the unused amount in the 529 plan to another qualified beneficiary.

The contribution limit

The 529 plan does not have an annual contribution limit. However, since contributions to 529 are considered gifts, it falls under the gift tax regulations:

  • Max $15,000 per year if filing single (or $75,000 over five years) 

  • Max $30,000 if filing married jointly (or $150,000 over a five-year period)

How to use 529 to fund for your kids’ college

Now, let’s calculate how much you need to contribute to your kids’ 529 plan to fully fund their college education, including their room and board.


With a 7% annual return rate, you will need to contribute $1,112.02 every month in order to fully fund two children’s education.




This still sounds like a lot of money. Don’t lose heart yet. There are many other ways to afford college.

Other ways to afford college

  1. Find a school that is close to your home, so that your children can save money on room and board.

  2. Go to a community college first for two years, then transfer to another state university. Community college tuition is often way cheaper than other universities.

  3. Get financial aid.

  4. Apply for scholarships.

  5. Some universities provide tuition remission or assistance for your children if you have been working in that university for a certain period of time.

  6. Go to a college in countries other than the US. Some countries offer high quality education with cheaper tuition than the US.

  7. You kids can find summer jobs or on-campus jobs to help pay part of their expenses.

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