FREE NEWSLETTER
DRIVE TO HOSPITAL. Cut the umbilical cord. Figure out names. Open a 529.
While the primary focus upon our two babies’ births was bonding, I had another item to check off: I opened a 529 college savings account for each one within a month of their births.
It’s paid off handsomely. Through automatic monthly contributions—plus stellar market performance over the past decade—they’ve amassed sizable balances for higher education. One child now is in high school, the other is a middle-schooler. Based on what we’ve already accumulated, I’m considering pausing future contributions to their 529s.
Why? At this point, I see two likely scenarios: We’ll either overfund our 529s—or we’ll wind up with a serious shortfall. I know that sounds confusing, but it all depends on which colleges they attend. To decide whether to continue contributing, I’ve been researching what their colleges might cost. And the answers I’ve found are confounding.
Unlike most other areas of financial planning, college presents parents like us with a staggering range of possible costs. For example, the average cost for four years of public college is now about $105,000 for in-state students. The comparable cost for a private college is $220,000, according to EducationData.org. These figures include room and board. If either child decides to attend a local community college for the first two years—a viable option in our area—the four-year cost could drop to around $65,000.
I consider myself to be well-versed in financial planning and higher education. After all, I’m a college professor. Still, the incredible disparity in average college costs leaves me surprised.
Just to make it more difficult, these figures I’m quoting are averages. Many schools’ published prices are much, much higher. The full cost for football rivals Notre Dame and the University of Southern California (USC) in 2021-22 are $58,843 and $60,446, respectively. Add in room and board, and the cost balloons to about $320,000 for four years at both colleges.
The main difference between the full cost and the average cost charged are explained by tuition discounts. According to InsideHigherEd.com, the average tuition discount rate was 48.1% for the 2020-21 school year.
I recently spoke to the vice president of admissions for a private university in the southeast. This person said that private universities provide discounts to nearly all students to improve affordability and to attract top students. The discounts usually only apply to tuition, however, so room and board are still full fare.
Naturally, I would welcome tuition discounts for my children. But discounts or not, I won’t actually know how much my kids’ colleges will cost until about six months before freshman orientation. Until then, we’re flying blind on the true cost of college.
One final wrinkle: Inflation in college costs will surely lever up our bills. Four-year college costs rose 2.2 percentage points a year above the inflation rate between 2010 and 2020, according to the College Board. If general inflation averages 3% over the next six years and college costs climb two percentage points faster, the average in-state rate for a public school would jump from $105,000 to $141,000 for four years. (I chose six years from now because that’s the midpoint of my high-schooler’s college career.) Using the same factors, the average cost of a private school would jump from $220,000 to $295,000 for four years. What about the $320,000 four-year, full-fare price for the likes of Notre Dame and USC? That could jump to a shocking $430,000.
The bottom line: The possible college cost for my oldest child ranges from $65,000 to $430,000. It’s as if I’m saving to buy a car without knowing if I’ll be driving off the lot in a Honda Civic or a Lamborghini Countach.
Given this uncertainty, I plan to act conservatively. I’ll keep contributing to both kids’ 529 accounts at our current pace. In a few years, we’ll know the cost of our oldest child’s college. If we’ve oversaved—is that even a word?—we can transfer leftover funds to our younger child’s 529 and do the confounding college scenario planning all over again.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. Follow Kyle on Twitter @KyleGMcIntosh and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Potential college costs do vary widely, but I suggest setting a realistic goal for your family/financial situation then work with the child to make a college decision based on the available funds. If they want to go to an expensive private college that exceed available funds, then they need to earn the grades for a discount and/or consider loans. Arguably, kids don’t realistically know the impact of debt, so I would really push back on any college choice that required loans. Better not to go that route unless there is a strong reason for doing so. Lots of variables to consider: major, reputation of school, masters, etc. In the end the child will ultimately decide their success/failure, not the school they go to.
So many kids in debt who didn’t finish their degree, ended up not getting a job in their major, job salary not justifying the cost of college….
Preparing for the cost of college for middle class and upper middle class families is maddening in exactly the way you express it.
Especially since your teens won’t know the cost of a college unless they apply and get accepted. They might get a good financial aid package or virtually none at all. An admitted “average” discount rate is not guaranteed. Universities would like as many people as possible to pay as close as possible to the rack rate, and have strategic enrollment managers on their executive teams who will be seeking to maximize the contribution from your family.
The value of going to college is in some measure directly related to the cost paid. So if I pay nothing (a two year degree in community college for something I can get hired in, directly out of community college, for instance), then the value is great. If I pay top dollar and after graduation am working at the same job I could have got even before leaving high school, and I took out a bunch of loans to get the degree, the value drops to sub-zero.
The greedy, tax gobbling over-regulated state of California offers no, ZERO, NADA, ZILCH deduction for 529 contributions. Why on earth would anyone contribute money to a 529 which narrows the ways the money can be spent and PENALIZES you if you don’t use it for the (potentially increaseing or decreasing, depending on the government’s greed) for educational purposes?
The options for the 529 are pretty broad though I am not sold on it being the best way to save for college. That will be the topic of a future article for sure!
We just stopped contributions to my daughter’s 529 for the same reason. But I am wondering if overfunding that account might be a good way pass on some money to her at a relatively favorable tax rate. My understanding is that if she doesn’t use it for school, or if her theoretical future children don’t use it, she will owe 10% on the gain. That is a lot lower than we’ll pay, but I haven’t investigated this yet.
If you overfund her 529, there is a long list of family members that you can make the beneficiary of the 529. It can even be a future grandchild who is not yet born. That said, you’d need to continue to pay the fees associated with the account during the time that the funds sit there. I am planning to do a more comprehensive write-up on this topic at some point the future.
If money is withdrawn for reasons other qualifying education expenses, income taxes are owed on the account’s investment gains — plus a 10% tax penalty.
Thanks for the clarification. There goes that fantasy!
Count us in the camp of folks who are not sure college is worth it. Despite both going to well-respected but expensive private colleges, my wife and I don’t think we are any better off than if we had gone to much cheaper options for our careers in medicine and law. We would almost certainly be wealthier even though we both received scholarships to attend our universities.
Because our kids show zero interest in following in these professions, which require college and graduate degrees, I’m not convinced that college is better than trade school or entrepreneurship with selected classes online that help build out that foundation. I believe the landscape is changing due to these costs you outline and potent political bias injected into instruction and grading that is turning off a significant portion of the population. As a history major, I can’t say that I’ve ever used my major for anything other than the occasional odd fact at a dinner party (when those used to be a thing).
I believe if parents were aware of what is going on at most college campuses, they’d insist on their children finding an alternative path towards a career. https://www.theatlantic.com/education/archive/2019/07/has-college-gotten-easier/594550/
The site “Rate my prof” has surely contributed to the grade inflation mentioned in the article.
Universities historically contributed towards a better society – education, research, critical thinking. Times have changed… now the goals are just increasing revenue and trying to goose the rankings to further increase revenue and prestige for the president and trustees. I think most of them should loose their not-for-profit status.
I couldn’t agree more. Once colleges had to start supplying their 4-year graduation rates, it’s amazing how quickly those improved. Many went from graduating 45-50% of their students in 4 years to 80-90%. I wonder how that happened so quickly?
I suspect administrative bloat is partially to blame for the rapid rise in tuition over the past decade or so. I just found this statistic from an old issue of The Atlantic: “The number of executive, administrative, and managerial employees on university campuses nationwide continued its relentless rise right through the recession, up by a collective 15 percent between 2007 and 2014, the federal data show. From 1987 to 2012, it doubled, far outpacing the growth in the numbers of students and faculty. At many four-year institutions, spending on administration has increased faster than spending on instruction…” The article is here: https://www.theatlantic.com/education/archive/2016/10/ballooning-bureaucracies-shrinking-checkbooks/503066/
I hope you talk with your high schooler about your research on college costs and that 529 account. They’re perfect topics for financial education, because they affect choices he’ll be making soon. My oldest nephew applied widely, but his final choice of college considered net cost, because “I want to be able to buy a car when I start working, not spend all my money on student loans like [older cousin].” His younger siblings also paid attention. The youngest noted that medical school isn’t cheap so he needs to take advantage of AP and dual credit programs in high school, so he can do bachelor’s in three years and have some 529 money left for medical school.
We are starting the conversation with him. He’s only 14, so are are trying not to put too much pressure on the college topic now. But overtime, we will certainly discuss the overall picture more with him. Both of our kids are pretty well versed in financial topics as I share here: https://humbledollar.com/2021/08/the-next-1000/
I invest each month in 529 plans for eleven grandchildren. It’s not much, but the oldest is 16 and has enough in our account to cover the first year anyway. Their parents have their 529s too.
We used to put a note in their birthday cards saying we added extra to their college fund until one of the five year olds told us he wanted the cash not a coupon. No cash from us.
We have four children and we had one, two or three children in private colleges at the same time for ten consecutive years, back when Carnegie Mellon was about $20,000 a year. I wish I had 529s back then.
Instead, I used all my investments, mortgaged my house twice, took a 401k loan and started a side business to help squeeze more for monthly payments. A pretty stressful ten years, but if need be I’d do it again.