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!