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Am I Saving Enough for My Child's Education?

Am I saving enough for my children’s education?

Recently my younger brother had his first baby and as soon as she has a social security number, I’ll be opening a 529 account for her. I opened one for my niece and nephew and contribute a small amount monthly. The reason I’m writing this short article is to help other parents, grandparents, aunts and uncles do the same for their loved ones.

Here’s the facts:  (Source: College Board)

-The average cost of 1-year of college at an average 4-year public institution (including tuition, fees, room and board) has tripled over the last 22 years, rising from $7,142 for academic year 1996-97 to $21,370 in 2018-2019.

-The cost of school has risen 5.4% per year over the last 30 years and if it continues at the same rate over the next decade, 1-year of college will cost $36,040 during the 2028-29 academic year.

-If it continues increasing at the same rate for 18 years the same in-state public school tuition will cost $56,362.  

If you don't want your kids moving back in with you because their student loan payments are too high, you can start investing using a 529 account. The contributions are tax deductible in the current year, the funds grow tax free, and if the money is used for education the gains also come out tax free.

Side note:  If the funds are not used for education the capital gains are taxed. (not a bad option). *but consult an accountant as I don’t give tax advice*   

What will be there for my child in 18 years?

The following are estimates and should be used for illustration purposes because I can’t predict what the market will give us but I want to show the power of starting early and believe using an average of 7-10% rate of return is a fair estimate for the equity markets.

If you deposit $25 per month and the portfolio returns an average of 7-10%, a child could have $10,768-$15,014 (depending on performance) in 18 years. If you deposit $100 per month at the same rate of return the balance could be $43,072-$60,056.

These numbers may not cover the entire amount of tuition, but everything helps. 

You can deposit a lump sum and never fund it again.  You can gift on birthdays and holidays. Multiple adults can contribute to the same 529 plan. It’s flexible and fees are generally low.

I personally used OregonCollegeSavings.com because they make it easy, but there are many providers and they very similar. I would suggest using the one in your state.

Once the money is in the account, select an investment option:  An easy answer is selecting an “age based portfolio” that becomes more conservative as the child gets older. However I prefer the “Diversified U.S. Equity” because it has my preferred investment mix with Small, Mid and Large exposure and invests domestically (based on their age).  I believe the U.S. equity market and investing in small and medium companies will provide an enhanced return over time.  I personally plan to keep it invested this way until each child turns 10-12 and at that point I may diversify a little more depending on where the market is at.

Student loan debt reached $1.46 trillion as of 12/31/18, up +8.6% per year over the last decade. An estimated 2 million millennials are living in rental housing today or they are back living with their parents instead of owning a home due to high student loan debt.  (Source: JP Morgan)

So, if you want your golden years to yourself, budgeting funds toward a 529 is a good plan.

Hope this helps. Let me know if you have any feedback, questions, comments.  Happy to help.

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