I’m at the stage in life where I get a lot of positive pressure to put money aside in a 529 college savings account for our children.
If you have children, I’m sure you get the same pressure.
If you’re like me though, you took action and you opened up a 529 plan and have started making automatic contributions.
But you might have that nagging question in the back of your mind,
“when my child heads off to college in x number of years, will this really have a positive impact on the affordability? (i.e. will this really work out to benefit my child?)”
Let’s take a look at the impact the 529 plan is having and how you can calm that nagging questions above.
How 529 Plans Are Being Used
On a macro level, we know that 529 plans are gaining popularity. However, their impact on the U.S. college student is still very small. They currently aren’t being used by many folks. Only around 5% (or 1.4 million) of U.S. college students actually used a 529 plan in 2011 to pay for some of their college education.
So even though you and I know and use 529 plans, parents of kids heading off to college today didn’t know much about them or didn’t bother to learn about them and use them.
It does get better when you look at the average balance. In 2012 that number was around $17,000. While that won’t pay for an entire four years at most colleges, it’s evidence that people who have 529 plans are doing some serious saving.
How You Can Improve Your Chances of 529 Plan Success
Let’s go back to our question: will the 529 plan really work out to benefit my child? The three factors involved in answering the question for yourself are:
- What will the cost of college be like when my child graduates high school?
- Is my savings enough, or will the return on my savings be enough?
- Will my 529 plan assets reduce the financial aid my child receives?
We can somewhat control the first two factors. And the third likely isn’t much to worry about.
Controlling Costs of College
While we can’t control the actual cost of an individual college, by being open to choosing a more affordable college, we can remain flexible in our choice and choose the college that makes the most financial sense when our children graduate.
By 2030 it will likely cost a quarter of a million dollars to attend a private university (crazy), but a public university will probably cost $100,000. Still insane, but it shows the huge difference choice can make. And if your child is willing to do 2 years at a community college, then that price could be reduced even further.
Controlling Savings and Return on 529 Plans
We can certainly control how much we save each month towards our 529 plan. Even if it’s just a small amount each month, it can have a pretty big impact. $50 a month over 18 years at 7% expected return will net $21,700. Invest a couple of tax returns over the years and that number could be much higher.
We can’t control the stock market return, but we can diversify our investments within our 529 plans such that they aren’t exposed to a great deal of risk the closer your child gets to graduation.
So the bottom line seems to be to save more, diversify, be flexible in college choice, and temper your expectations about covering 100% (which may not be desirable anyway…see my thoughts on millionaires below).
Controlling Financial Aid Impact of 529 Plans
But what about that third factor? How will your federal education assistance be affected by what you have saved in your 529 plan? If you look at the FAFSA right now, the 529 plan is supposed to be considered as an investment asset owned by the parents. This will have an impact on how much federal student aid the student will qualify for. But only by a small amount.
According to Vanguard, the worry about 529 plan impact in financial aid is unfounded. Parents get to exclude some non-retirement assets (including the 529 plan) and those 529 plan assets that do get included are only able to affect financial aid by a maximum of 5.64%.
So if you have $25,000 saved up in a 529 plan and you can’t use the non-retirement funds exclusion (because you have a boat load of cash, for instance), your child will receive $1,410 less in financial aid. While that’s not chump change, it isn’t a reason to stop using your 529 plan.
Additionally, some private colleges take into account the 529 plan assets when doling out aid packages. From all of the poking around that I’ve done it appears that this is a college by college impact and so your best bet is to be in contact with the college to learn of their policies. All the more reason to stay flexible with college choice.
How One Family Used Their 529 Plans
When it comes to diversifying contribution sources, some people use a hybrid approach involving a 529 prepaid plan and a savings plan to guarantee that most or all college expenses will be affordable. Here’s an example:
Here’s Jan Keenan, a mom of three recent college graduates and an attorney at Keenan & Austin, P.C.. She chose to use a hybrid approach to create a little more security with her education savings.
We bought MET (Michigan Education Trust) contracts for our three children when they were 12, 11, and 8. We also put money into 529 savings plans for them when they were a few years older. The MET contracts paid for their tuition, and the 529 savings plans paid for their room, board and books.
We paid $20,000.00 for each MET contract and they paid out an average of about $40,000.00 in tuition costs for each child. We put $22,000.00 into the 529 for our oldest, $21,000.00 for our middle child, and $18,000.00 for our youngest. By the time each kid got to college, they each had about $28,000.00 in their 529 accounts.
Remember that prepaid plans have their pros and cons, so make sure you understand the difference between a 529 savings plan and a 529 prepaid plan at the individual state level. But I do like this hybrid approach and honestly I’d never thought of it. Prepaid plans are only available in some states.
The Millionaire Next Door Shouldn’t Pay for Their Kid’s College
I’ve been listening to the Millionaire Next Door lately and the authors spend a lot of time talking about how millionaires (specifically the next door variety) end up using their wealth for their kid’s education (private schools, colleges). They say that this is a mistake because children that receive large financial gifts are not frugal with that money.
The need for frugality is what is credited with making the millionaires next door millionaires to begin with. So by giving your children a big financial gift you are depriving them of one of the factors that will help them become a millionaire themselves.
I’m a believer in that approach. Mrs. PT is a staunch believer in it. The money we have saved in our 529 plans for our children will be more of a supplement. Right now we are placing $25 a month for each child into 529 College Savings Plans with Ohio’s College Advantage plan.
With a few lump sum contributions and some birthday money, we will likely be able to help our girls out with a few semesters of college. We’re excited to see our kids taking some responsibility for the cost of their education. They can do this by working, using scholarships, or even taking small loans (which I’m not entirely opposed to).
What about you? How are you using, or how did you use, a 529 plan to save for college expenses? Are you worried that the money will be there when you need it? Are you worried about the cost of college?