529 contributions and future tuition costs

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ERMD
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529 contributions and future tuition costs

Post by ERMD »

hello all -

i was recently prompted to explore the expected cost of college tuition 18 years from now, when my son will be finishing high school. just thought i'd share with everyone after going through the work myself, in case anyone is interested. based on the estimates below, i've constructed a chart of required 529 contributions assuming a 7% annual return. this obviously will vary a bit depending on your 529 asset allocation, but 7% is a good midpoint.

tuition estimates (confidence interval, 5 to 7% annual inflation)
4 years, public university, in state, 2032: $54,941/yr (CI $46,323 - $64,729)
4 years, public university, out of state, 2032: $95,113/yr (CI $80,194 - $123,864)
4 years, private university, 2032: $123,760/yr (CI $104,347 - $146,548)
* data based on adjusted estimates from Campus Consultants Inc.

required monthly 529 contribution, per child
for in state tuition at a public university, $510.24 per month (CI $430.20 - $601.12)
for out of state tuition at a public university, $883.28 per month (CI $744.76 - $1,150.28)
for private university, $1,149.32 per month (CI $1,231.30 - $2,041.44)

one thing to note is that these estimates can vary quite largely, based on both the rate of tuition increases and expected 529 returns. however, i believe the averages listed above are good approximations, and are what i will likely be using going forward.
Last edited by ERMD on Sun Mar 02, 2014 5:26 pm, edited 1 time in total.
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steve_14
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Re: 529 contributions and future tuition costs

Post by steve_14 »

I'd probably use a 4% or so return - a 100% stock allocation would be lucky to get 7% over the next 20 years.
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ERMD
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Re: 529 contributions and future tuition costs

Post by ERMD »

steve_14 wrote:I'd probably use a 4% or so return - a 100% stock allocation would be lucky to get 7% over the next 20 years.
how do you figure? are you assuming a 20+ year deviation from historic returns? that seems awfully pessimistic. even a 70/30 equities/bonds split over the last 86 years has had an annual 9.1% return.
between scotch and nothing, i'll take scotch. -- faulkner
steve_14
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Re: 529 contributions and future tuition costs

Post by steve_14 »

Well bonds are yielding around 2%. A historical ERP of 4.5% puts expected stock returns around 6% if you're conservative, 7% if you're generous. Most people will be varying their 529 asset allocation from mostly stocks to mostly bonds as college approaches, so I get 4%.

The fact that bonds were yielding 6% and stocks 11% at points in the past has no bearing on current expected returns.
drpepper
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Re: 529 contributions and future tuition costs

Post by drpepper »

ERMD wrote:hello all -

i was recently prompted to explore the expected cost of college tuition 18 years from now, when my son will be finishing high school. just thought i'd share with everyone after going through the work myself, in case anyone is interested. based on the estimates below, i've constructed a chart of required 529 contributions assuming a 7% annual return. this obviously will vary a bit depending on your 529 asset allocation, but 7% is a good midpoint.

tuition estimates (confidence interval, 5 to 7% annual inflation)
4 years, public university, in state, 2032: $54,941/yr (CI $46,323 - $64,729)
4 years, public university, out of state, 2032: $95,113/yr (CI $80,194 - $123,864)
4 years, private university, 2032: $123,760/yr (CI $104,347 - $146,548)
* data based on adjusted estimates from Campus Consultants Inc.

required monthly 529 contribution, per child
for in state tuition at a public university, $127.56 per month (CI $107.55 - $150.28)
for out of state tuition at a public university, $220.82 per month (CI $186.19 - $287.57)
for private university, $287.33 per month (CI $246.26 - $340.24)

one thing to note is that these estimates can vary quite largely, based on both the rate of tuition increases and expected 529 returns. however, i believe the averages listed above are good approximations, and are what i will likely be using going forward.

I think your contribution estimates allow for 1 year of tuition expenses, not 4 years. to pay for 4 years, the contributions would need to be substantially higher.
letsgobobby
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Re: 529 contributions and future tuition costs

Post by letsgobobby »

drpepper wrote:
ERMD wrote:hello all -

i was recently prompted to explore the expected cost of college tuition 18 years from now, when my son will be finishing high school. just thought i'd share with everyone after going through the work myself, in case anyone is interested. based on the estimates below, i've constructed a chart of required 529 contributions assuming a 7% annual return. this obviously will vary a bit depending on your 529 asset allocation, but 7% is a good midpoint.

tuition estimates (confidence interval, 5 to 7% annual inflation)
4 years, public university, in state, 2032: $54,941/yr (CI $46,323 - $64,729)
4 years, public university, out of state, 2032: $95,113/yr (CI $80,194 - $123,864)
4 years, private university, 2032: $123,760/yr (CI $104,347 - $146,548)
* data based on adjusted estimates from Campus Consultants Inc.

required monthly 529 contribution, per child
for in state tuition at a public university, $127.56 per month (CI $107.55 - $150.28)
for out of state tuition at a public university, $220.82 per month (CI $186.19 - $287.57)
for private university, $287.33 per month (CI $246.26 - $340.24)

one thing to note is that these estimates can vary quite largely, based on both the rate of tuition increases and expected 529 returns. however, i believe the averages listed above are good approximations, and are what i will likely be using going forward.

I think your contribution estimates allow for 1 year of tuition expenses, not 4 years. to pay for 4 years, the contributions would need to be substantially higher.
Exactly
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Re: 529 contributions and future tuition costs

Post by ERMD »

whoops! i had those corrected on my end and copied the old numbers over. fixed now, sorry about that.
between scotch and nothing, i'll take scotch. -- faulkner
PS241
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Re: 529 contributions and future tuition costs

Post by PS241 »

In 18 years college might look vastly different than it does today. As the rest of the world continues to grow in their education, U.S. wages are likely to remain stagnate or even decrease. With that being the case, there is going to be severe pressure on the universities to decrease costs as the education costs relative to earning power decrease. At this point we are still in the infancy of online classes offered from places like udacity, coursera, kahn academy, edx, etc..

All that being said, I do not think it is unwise to save prodigiously for college, but I do believe it to be prudent to consider these possibilities for the future.
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Re: 529 contributions and future tuition costs

Post by goodenyou »

At those projections, it may not be wise to go to college at all. You may be better off finding a skilled labor job. I can't imagine paying $500k+ for an education, but, then again, I don't think anyone imagined paying $250k for private school 18 years ago. It is getting beyond absurd.
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Re: 529 contributions and future tuition costs

Post by letsgobobby »

goodenyou wrote:At those projections, it may not be wise to go to college at all. You may be better off finding a skilled labor job. I can't imagine paying $500k+ for an education, but, then again, I don't think anyone imagined paying $250k for private school 18 years ago. It is getting beyond absurd.
And even at $250k, a Harvard education is absolutely worth the money paid. Not every time, but quite often.
nostalgic
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Re: 529 contributions and future tuition costs

Post by nostalgic »

PS241 wrote:In 18 years college might look vastly different than it does today. As the rest of the world continues to grow in their education, U.S. wages are likely to remain stagnate or even decrease. With that being the case, there is going to be severe pressure on the universities to decrease costs as the education costs relative to earning power decrease. At this point we are still in the infancy of online classes offered from places like udacity, coursera, kahn academy, edx, etc..

All that being said, I do not think it is unwise to save prodigiously for college, but I do believe it to be prudent to consider these possibilities for the future.
It will be interesting to see how this plays out. I read somewhere that even though there are record numbers of international students studying in the US, they still only make up 4 or 5% of the total. I would assume that top-tier schools will have no problem in shifting their focus to recruit internationally (maybe this has already happened for grad school?) as the rest of the world grows richer, but I wonder how the average state school will adjust.
HopeToGolf
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Re: 529 contributions and future tuition costs

Post by HopeToGolf »

ERMD

Thanks for sharing.

I ran a similar analysis and came up with similar results for education starting roughly 10 years from now. Can you share the 2013/2014 cost to attend for each class of university in your model? I think it would be helpful to give the readers a sense of today's cost. Thanks.
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Re: 529 contributions and future tuition costs

Post by ERMD »

HopeToGolf wrote:ERMD

Thanks for sharing.

I ran a similar analysis and came up with similar results for education starting roughly 10 years from now. Can you share the 2013/2014 cost to attend for each class of university in your model? I think it would be helpful to give the readers a sense of today's cost. Thanks.
sure thing - for public in state, public out of state, and private, the 2013/2014 numbers are $18,038, $31,227 and $40,633, respectively.
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Re: 529 contributions and future tuition costs

Post by Grt2bOutdoors »

Unrealistic and out of touch with yesterday's today's and tomorrow's economic enviornment. But continue along the philosophical belief that trees grow to the sky forever, as will your retirement plan and home prices. The key to continued tuition inflation is the same as that of the housing market - shut or tamp down the flow of credit and suddenly that Ivy league price tag of $500,000 becomes $100,000. Sound like pie in the sky? No less so, then these ridiculous estimates of education inflation of 6% ad infinitum, or these thoughts that one can get a pension paying 70-80% of their final pay starting at age 50. One can see why the average person would not want to participate on this forum - it's posts like these saying they need to contribute $500 plus a month from day of birth to give their kid a chance of receiving a higher education, totally unrealistic for the average person in the U.S.
Last edited by Grt2bOutdoors on Mon Mar 03, 2014 10:16 am, edited 1 time in total.
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Re: 529 contributions and future tuition costs

Post by NorCalDad »

In California, sticker tuition doubled at public universities during the recession, but the net cost of tuition increased by roughly the rate of inflation for all but the highest-earning households. There's a huge difference between sticker price and what people actually pay. Many (most?) of us here will face the sticker price by today's rules, but to believe that tuition inflation will continue at the rates implied here is to believe that the pool of families that gets stuck with sticker price will get smaller and smaller such that only 5% or less of families pay it. Or that students will borrow at increasing rates that exceed inflation, the latter of which I consider unlikely given the growing awareness of student debt burden.

Perhaps the sticker estimates are a legitimate concern for the OP if he is an ERMD, but I do not see how even those in the upper middle class will pay the amounts listed. I would seriously consider early retirement for financial aid purposes if college tuition got to the level of $100,000/year and my pay only increased by the rate of inflation over the next 18 years.

That is really the only way universities can continue raising the sticker price beyond inflation. Tuition is an opaque game, though it is becoming less so each year as families become more aware of the factors that play into it. At the same time, universities and students are growing more comfortable with online learning methods that can restrain costs. Keep this in mind when you talk about college price 18 years down the road.
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Re: 529 contributions and future tuition costs

Post by sunnyday »

Do most people really think tuition will increase at 7% over the next 18 years? I think technology and things like MOOCS will help bring costs down. We can all take classes for free at some of the top universities in the world. I even think the value of a diploma will start to decrease over time (except for some professions like doctors).
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Re: 529 contributions and future tuition costs

Post by ERMD »

Grt2bOutdoors wrote:Unrealistic and out of touch with yesterday's today's and tomorrow's economic enviornment. But continue along the philosophical belief that trees grow to the sky forever, as will your retirement plan and home prices. The key to continued tuition inflation is the same as that of the housing market - shut or tamp down the flow of credit and suddenly that Ivy league price tag of $500,000 becomes $100,000. Sound like pie in the sky? No less so, then these ridiculous estimates of education inflation of 6% ad infinitum, or these thoughts that one can get a pension paying 70-80% of their final pay starting at age 50. One can see why the average person would not want to participate on this forum - it's posts like these saying they need to contribute $500 plus a month from day of birth to give their kid a chance of receiving a higher education, totally unrealistic for the average person in the U.S.
while i (nor anyone else) can say exactly what the cost of college tuition will be in 18 years, declaring that the rate is unsustainable and then proceeding to bury your head in the sand for the next two decades is not a solution. of course the rate is not sustainable towards infinity. as i myself have mocked in prior posts, college tuition cannot exceed the net worth of 99% of college-oriented families.

but when will we reach the flatter part of the curve, and how flat will it be? use the lower end estimates if you like -- you're telling me that 170k for 4 years of undergraduate education in the year 2032 seems "ridiculous" to you? it seems pretty reasonable to me.

also note that 529 funds can be transferred to different individuals, and used for both undergraduate and graduate education. for my purposes, it seems like a good investment and one that i can comfortable make at 500/month. don't have the finances for that? contribute less. any amount helps. but keep in mind the following: contributing $175 a month, at 7% annualized return, would not be enough to cover the cost of 4 years of tuition at most state schools today.
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Re: 529 contributions and future tuition costs

Post by ERMD »

also note again that my assumptions are based on 7% returns. if it's closer to 4%, which people smarter than i are suggesting, then even my "ridiculous" 500 a month is worth only 160k in 18 years.
between scotch and nothing, i'll take scotch. -- faulkner
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Re: 529 contributions and future tuition costs

Post by gte939h »

Thanks for posting your results. I have been doing similar research recently with our first child on the way. We decided to invest a lump sum in the 529 up front to reduce the monthly deposits needed.
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Re: 529 contributions and future tuition costs

Post by sunnyday »

Some questions to ask for the big 529 contributors:

Are you currently maxing all of your tax-advantage space?
Does your state offer a tax break on 529 contributions?
Are you debt free?
Are you financially independent?

Since I don't get a 529 tax-break, I feel that I shouldn't contribute anything to a 529 until I'm debt free and financially independent.
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Re: 529 contributions and future tuition costs

Post by Laura »

I have been busy visiting a variety of universities across the United States during the last year. We have seen public and private, large and small, and the cost of attendance is astonishing. $20k for tuition, room, board, and books at an in state public school seems the norm. That comes to a minimum of $80k for a four year degree however many students today don't finish in 4-years. In fact, during tours of the various public university systems in one state, the student tour guides were busy explaining that it is almost impossible to get your required classes in time to graduate in four years because of budget cuts. They promoted summer classes and a variety of other tricks to get into the classes that you need. It seems that 5-6 years is become the norm at many schools. Sometimes this is because students are busy with paid internships for a semester or two along the way which is different than not being able to get the classes you need.

Private Universities were routinely $50-$60k and many were significantly higher. Of course, acceptances came in with scholarship offers and it seems that the private schools can be accessed by many for about $40k tuition, room, board, and books.

I have no idea how the typical American can pay for this. Even $80k for a four year degree is unaffordable for most. We see the results in the large loan balances posted by many on this forum.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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Re: 529 contributions and future tuition costs

Post by gte939h »

sunnyday wrote:Some questions to ask for the big 529 contributors:

Are you currently maxing all of your tax-advantage space?
Does your state offer a tax break on 529 contributions?
Are you debt free?
Are you financially independent?

Since I don't get a 529 tax-break, I feel that I shouldn't contribute anything to a 529 until I'm debt free and financially independent.
We max out tax advantaged space (401k, IRA for me and wife), no state tax so no break, only debt are investment house mortgages.
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Re: 529 contributions and future tuition costs

Post by ERMD »

sunnyday wrote:Some questions to ask for the big 529 contributors:

Are you currently maxing all of your tax-advantage space?
Does your state offer a tax break on 529 contributions?
Are you debt free?
Are you financially independent?

Since I don't get a 529 tax-break, I feel that I shouldn't contribute anything to a 529 until I'm debt free and financially independent.
that's a good point. i get a nice state tax break on my 529 contributions, so that's important to factor in. also, our student loan debt burdens are huge, and we probably won't be debt free for almost 10 years, even aggressively paying those loans. so we don't want to start the college fund when he's already 10 years old, if we can help it. but those are all good points to consider.
between scotch and nothing, i'll take scotch. -- faulkner
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Re: 529 contributions and future tuition costs

Post by dad2000 »

sunnyday wrote:Do most people really think tuition will increase at 7% over the next 18 years? I think technology and things like MOOCS will help bring costs down. We can all take classes for free at some of the top universities in the world. I even think the value of a diploma will start to decrease over time (except for some professions like doctors).
+1

I expect average tuition increases to be much lower in the future and am planning on CPI-U+1%. IMHO, 5-7% real increases are simply not sustainable in the long run (~12-18 years), as they would result in the bursting of a credit bubble and/or a significant drop in demand, particularly for non-top-tier private schools.
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Re: 529 contributions and future tuition costs

Post by Grt2bOutdoors »

Laura wrote:I have been busy visiting a variety of universities across the United States during the last year. We have seen public and private, large and small, and the cost of attendance is astonishing. $20k for tuition, room, board, and books at an in state public school seems the norm. That comes to a minimum of $80k for a four year degree however many students today don't finish in 4-years. In fact, during tours of the various public university systems in one state, the student tour guides were busy explaining that it is almost impossible to get your required classes in time to graduate in four years because of budget cuts. They promoted summer classes and a variety of other tricks to get into the classes that you need. It seems that 5-6 years is become the norm at many schools. Sometimes this is because students are busy with paid internships for a semester or two along the way which is different than not being able to get the classes you need.

Private Universities were routinely $50-$60k and many were significantly higher. Of course, acceptances came in with scholarship offers and it seems that the private schools can be accessed by many for about $40k tuition, room, board, and books.

I have no idea how the typical American can pay for this. Even $80k for a four year degree is unaffordable for most. We see the results in the large loan balances posted by many on this forum.

Laura
Exactly. The same way my 20 year old friends were purchasing homes back in 2003-2007, with a 5% down ARM, a 3% FHA loan, an 80/10/10 piggyback loan and all the while making $7 an hour. I've seen this movie before, and it's not going to end well as all, makes no difference if the debt is non-dischargeable or not. People will never learn, only this time the bondage is indeed very real and Moses won't be there to free them. If you want a real eye-opener, read the front page of today's WSJ "Low Cost Loans Entice Students More for the Cash than the Degree" - unbelievable they actually allow the taking of cash to fill your refrigerator and pay questionable personal expenses. The government needs to hire fraud investigators and stop the nonsense - and you wonder why the average citizen is skeptical of the regulators. :oops:
Last edited by Grt2bOutdoors on Mon Mar 03, 2014 12:58 pm, edited 1 time in total.
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Re: 529 contributions and future tuition costs

Post by michaelsieg »

sunny day wrote
Since I don't get a 529 tax-break, I feel that I shouldn't contribute anything to a 529 until I'm debt free and financially independent.
I am not sure if I agree with this. For our family, we started the 529 contributions really early, and it is amazing how with the steady drop of regular contributions, the portfolio size has increased. For me an important factor was that the money can grow tax free over about 20 years and that a regular savings-plan helps to stay focused and disciplined.
If the above statement was true, then very few families with kids could start saving in a 529 plan, as most people starting a family carry a mortgage - which would defeat the main advantage (IMO), which is tax free compounding over about 2 decades. I also agree with a previous poster that a 4% real return is more realistic over the next 1-2 decades.
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Re: 529 contributions and future tuition costs

Post by jon-nyc »

ERMD, thanks for posting your assumptions and analysis.


I also have a pretty detailed model. I plan 'conservatively' for 4+ years at a tier one private institution. (I should say that's conservative from a financial-planning point of view, not a parental-expectations point of view)

My first observation is that the rate of increase in the (limited) data I have shows that tier-one privates are on the low end of your assumed growth range and the tier-one publics are on the high end of your growth range, or even above it. I suspect the actual cost inflation is similar in both, but decreases in subsidies resulted in more tuition inflation in the high-end publics.

Second observation - that decrease of subsidies has a limit. That means that the delta between growth rates in tier-one publics and tier-one privates should narrow or even converge. Indeed, if they didn't, it wouldn't be that many years before UVA, Berkeley, etc were significantly more expensive than Harvard and Yale, which is something I doubt would happen. (list prices anyway).

Just a couple of data points:

Tier-1 public: UVA out of state undergrad tuition rose 7.38% (CAGR) from 1990-2010, which is ~4.5% real. Note the 10 year and 5 year increases were lower, 6.74 and 6.82% respectively.

Tier-1 private: Harvard undergraduate tuition rose 4.7% (CAGR) in the 20 years to 2011, which is ~2.2% real. Room and board increase was slightly less. As with UVA, the 10 and 5 year rates of increase were a tad lower - 4.4% and 4.0% respectively, or 2.0% and 1.8% real.


For my planning purposes, I accelerated the funding so that I would have enough for 4 years of tier-1 private at TODAYs rates - on the order of 250k (my son is still in pre-K). Now I'm essentially banking on the market (watered down through my AA) outpacing tuition increases. Historically that has been a good bet. Of course it may not happen over the next 15 years, but I can and will midcourse correct if I see costs significantly outpacing the growth of the 529.

I should add that my approach carries with it a material risk of overfunding. I happily accept that, either to pay for his grad school or to pay for grandkids education expenses someday.
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Re: 529 contributions and future tuition costs

Post by sunnyday »

gte939h wrote:
sunnyday wrote:Some questions to ask for the big 529 contributors:

Are you currently maxing all of your tax-advantage space?
Does your state offer a tax break on 529 contributions?
Are you debt free?
Are you financially independent?

Since I don't get a 529 tax-break, I feel that I shouldn't contribute anything to a 529 until I'm debt free and financially independent.
We max out tax advantaged space (401k, IRA for me and wife), no state tax so no break, only debt are investment house mortgages.
Your situation is different than mine, but if you're considering retiring before your children go to college you may want to consider paying down debt or contributing to taxable before a 529. There a lot of factors to consider so the projections for each person are tough to estimate.
With no tax break, the only way I'd contribute to a 529 is if I was loaded (or at least financially independent). Then again, maybe I wouldn't:

Jack Bogle -- http://www.reuters.com/article/2012/09/ ... LI20120911
Jack Bogle wrote: Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

A: I don't really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I'm not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It's about 60 percent stocks, 40 percent bonds, and it's been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.
ERMD wrote:
that's a good point. i get a nice state tax break on my 529 contributions, so that's important to factor in. also, our student loan debt burdens are huge, and we probably won't be debt free for almost 10 years, even aggressively paying those loans. so we don't want to start the college fund when he's already 10 years old, if we can help it. but those are all good points to consider.
Pretty much all things I've read (not just Bogleheads) recommend maxing out tax-advantage retirement accounts first. With a nice 529 tax break, I'd probably invest as:

1. Max out tax-advantage retirement accounts
2. Max out 529 up to, but no more than the tax-break limit
3. Pay off debt
4. Invest in taxable
5. Contribute additional to 529 after financial independence is reached

My wife and I both grew up without much money but went to an expensive private school. We (like the vast majority of students) received financial aid and had student loans when we graduated. We got jobs where paying down the loans wasn't a cause for stress.

However, that was 11 years ago and the price of a diploma is increasing, while the value is probably decreasing. Things are getting tougher for families and young graduates.

Families will need to ask: If the education isn't able to land a job where you can easily pay the student loans, was the education worth it?
Last edited by sunnyday on Mon Mar 03, 2014 12:50 pm, edited 1 time in total.
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Re: 529 contributions and future tuition costs

Post by jon-nyc »

sunnyday wrote:Some questions to ask for the big 529 contributors:

Are you currently maxing all of your tax-advantage space?
Does your state offer a tax break on 529 contributions?
Are you debt free?
Are you financially independent?

Since I don't get a 529 tax-break, I feel that I shouldn't contribute anything to a 529 until I'm debt free and financially independent.
1 - yes.
2 - up to 10k.
3 - yes.
4 - yes.
jon-nyc
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Re: 529 contributions and future tuition costs

Post by jon-nyc »

jon-nyc wrote: Tier-1 private: Harvard undergraduate tuition rose 4.7% (CAGR) in the 20 years to 2011, which is ~2.2% real. Room and board increase was slightly less. As with UVA, the 10 and 5 year rates of increase were a tad lower - 4.4% and 4.0% respectively, or 2.0% and 1.8% real.

Some slightly more recent data available in the latest Harvard Factbook. The growth numbers have come down a bit from the above (which was the last version of my spreadsheet).

http://www.provost.harvard.edu/institut ... ncials.pdf
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Re: 529 contributions and future tuition costs

Post by sunnyday »

michaelsieg wrote:
sunny day wrote
Since I don't get a 529 tax-break, I feel that I shouldn't contribute anything to a 529 until I'm debt free and financially independent.
I am not sure if I agree with this. For our family, we started the 529 contributions really early, and it is amazing how with the steady drop of regular contributions, the portfolio size has increased. For me an important factor was that the money can grow tax free over about 20 years and that a regular savings-plan helps to stay focused and disciplined.
If the above statement was true, then very few families with kids could start saving in a 529 plan, as most people starting a family carry a mortgage - which would defeat the main advantage (IMO), which is tax free compounding over about 2 decades. I also agree with a previous poster that a 4% real return is more realistic over the next 1-2 decades.
For me, I realize there's a slight drag (less than 1%) with investing in taxable over investing in a 529. However, I feel the small trade-off is worth it because I'll be able to retire earlier and my children will be eligible for more financial aid with a smaller 529 account.

As far as families paying down debt instead of investing in a 529, I don't think that's a bad thing, especially for non-Boglehead Americans.
Last edited by sunnyday on Mon Mar 03, 2014 1:58 pm, edited 1 time in total.
feh
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Re: 529 contributions and future tuition costs

Post by feh »

PS241 wrote:At this point we are still in the infancy of online classes offered from places like udacity, coursera, kahn academy, edx, etc..

All that being said, I do not think it is unwise to save prodigiously for college, but I do believe it to be prudent to consider these possibilities for the future.
I echo these thoughts. I think a post-secondary education 18 years from now will vary substantially from the traditional experience.
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ERMD
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Re: 529 contributions and future tuition costs

Post by ERMD »

sunnyday wrote:For me, I realize there's a slight drag (less than 1%) with investing in taxable over investing in a 529. However, I feel the small trade-off is worth it because I'll be able to retire earlier and my children will be eligible for more financial aid with a smaller 529 account.
i make the same assumptions about financial aid in 20 years that i do about social security payments for myself in 30 years -- namely, they won't exist. probably more pessimistic than i need to be, but i don't want to be caught a day late and a buck short.
between scotch and nothing, i'll take scotch. -- faulkner
NorCalDad
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Re: 529 contributions and future tuition costs

Post by NorCalDad »

Laura wrote:I have no idea how the typical American can pay for this. Even $80k for a four year degree is unaffordable for most. We see the results in the large loan balances posted by many on this forum.

Laura
The typical American doesn't pay for this. The typical Boglehead may have to pay for this. About 2/3 of students receive financial aid. College seats are like airplane seats. The person sitting next to you on the plane or in class may be paying half of what you're paying. And as you suggested with loan balances, the person in the next row may have put it on the credit card.

I think this is an entirely different question for some families than it is for others. The dividing line falls somewhere around $175,000 (today's dollars) in household income, in my view. Below that, families are going to find it tough to max out retirement accounts and still have money left for 529s. Below that line, families may still qualify for some form of financial aid. Above that line, financial aid becomes less of a possibility, but there is also sufficient income to max out retirement accounts and start contributing to 529s and taxable accounts. Obviously this varies - some families making $125,000 are frugal enough to stash away $46,000 in 401ks/Roths and still contribute to 529s. And some families earning $200,000 spend so much money they can't max out retirement accounts.
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Re: 529 contributions and future tuition costs

Post by buckstar »

NorCalDad wrote: The typical American doesn't pay for this. The typical Boglehead may have to pay for this. About 2/3 of students receive financial aid.
Kind of a stealth tax on the wealthy?
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Re: 529 contributions and future tuition costs

Post by michaelsieg »

sunnyday wrote
For me, I realize there's a slight drag (less than 1%) with investing in taxable over investing in a 529. However, I feel the small trade-off is worth it because I'll be able to retire earlier and my children will be eligible for more financial aid with a smaller 529 account.
Thanks sunny day, I am not sure I understand your argument, but may be I am missing something.
The long-term capital gains taxes are now 20% for me, and even if they were 15%, I would expect to pay more than a 1% difference between my 529 and regular after tax savings. May be you mean the difference is 1% while you hold the investments in the accumulation phase? But you would owe significant taxes once you liquidate the funds to pay for college? And it also might influence the amount of AMT you owe. That is what I am trying to avoid with the 529.
One other way to avoid or reduce taxes, if you don't want a 529 plan, might be to have the mutual funds in your children's accounts, I guess they might not have to pay any capital gain taxes when they liquidate the savings to pay for college as they probably have an income below the threshold.
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Re: 529 contributions and future tuition costs

Post by sunnyday »

buckstar wrote: The typical American doesn't pay for this. The typical Boglehead may have to pay for this. About 2/3 of students receive financial aid.
Financial aid comes in many forms - loans, grants (both federal and institutional), work-study, scholarships.

How would Bogleheads have to pay for this?
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Re: 529 contributions and future tuition costs

Post by letsgobobby »

sunnyday wrote:
buckstar wrote: The typical American doesn't pay for this. The typical Boglehead may have to pay for this. About 2/3 of students receive financial aid.
Financial aid comes in many forms - loans, grants (both federal and institutional), work-study, scholarships.

How would Bogleheads have to pay for this?
Disproportionately in the income/asset tier where there will be no financial aid.
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Re: 529 contributions and future tuition costs

Post by sunnyday »

michaelsieg wrote:
sunnyday wrote
For me, I realize there's a slight drag (less than 1%) with investing in taxable over investing in a 529. However, I feel the small trade-off is worth it because I'll be able to retire earlier and my children will be eligible for more financial aid with a smaller 529 account.
Thanks sunny day, I am not sure I understand your argument, but may be I am missing something.
The long-term capital gains taxes are now 20% for me, and even if they were 15%, I would expect to pay more than a 1% difference between my 529 and regular after tax savings. May be you mean the difference is 1% while you hold the investments in the accumulation phase? But you would owe significant taxes once you liquidate the funds to pay for college? And it also might influence the amount of AMT you owe. That is what I am trying to avoid with the 529.
One other way to avoid or reduce taxes, if you don't want a 529 plan, might be to have the mutual funds in your children's accounts, I guess they might not have to pay any capital gain taxes when they liquidate the savings to pay for college as they probably have an income below the threshold.
I think what you're missing is in my examples, I'm saying what will work for me. Just because it may benefit me, doesn't mean it will work for you.


I have ample tax-advantage space
I plan to retire with no debt in the 15% tax bracket (0% LTCG)
I plan to have $0 in my taxable account when my child goes to college

Things could change, and if I keep working once I hit my number, I'll likely put money towards a 529. But for me and my plan for retiring early, I think contributing to a 529 is jumping the gun at this point.

letsgobobby wrote:
sunnyday wrote:
buckstar wrote: The typical American doesn't pay for this. The typical Boglehead may have to pay for this. About 2/3 of students receive financial aid.
Financial aid comes in many forms - loans, grants (both federal and institutional), work-study, scholarships.

How would Bogleheads have to pay for this?
Disproportionately in the income/asset tier where there will be no financial aid.
I can see the argument for grants. for the other forms of financial aid, not so much. When I was in college I had a scholarship, decent size student loan, and did a work-study program. I don't see how Bogleheads paid for this but if anyone on here wants to pay off the remaining balance on my student loan, it will be fine with me :D
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Re: 529 contributions and future tuition costs

Post by buckstar »

sunnyday wrote:
I can see the argument for grants. for the other forms of financial aid, not so much. When I was in college I had a scholarship, decent size student loan, and did a work-study program. I don't see how Bogleheads paid for this but if anyone on here wants to pay off the remaining balance on my student loan, it will be fine with me :D
If college costs are so high that the only people who pay "sticker price" for it are the wealthy then they are, in effect, subsidizing the grants and scholarships that others are receiving. Subsidy = tax
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Re: 529 contributions and future tuition costs

Post by goodenyou »

letsgobobby wrote:
goodenyou wrote:At those projections, it may not be wise to go to college at all. You may be better off finding a skilled labor job. I can't imagine paying $500k+ for an education, but, then again, I don't think anyone imagined paying $250k for private school 18 years ago. It is getting beyond absurd.
And even at $250k, a Harvard education is absolutely worth the money paid. Not every time, but quite often.
The education is not worth it, IMO. What you are paying for is the stamp of approval.
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Re: 529 contributions and future tuition costs

Post by NorCalDad »

sunnyday wrote:
buckstar wrote: The typical American doesn't pay for this. The typical Boglehead may have to pay for this. About 2/3 of students receive financial aid.
Financial aid comes in many forms - loans, grants (both federal and institutional), work-study, scholarships.

How would Bogleheads have to pay for this?
I wrote the original part, but the this to which I referred got omitted. The this was full-price tuition because Laura said she couldn't see how the typical American could pay for this. I said the typical American doesn't pay full tuition because 2/3 of families get financial aid. But the typical Boglehead may not qualify for financial aid.

Colleges are increasingly providing what is termed "institutional aid" in the form of scholarships. This is different from federal student loans, federal grants, federal work-study and state grants. Institutional aid largely comes out from the dollars that full-tuition students pay and the school's endowment. In the University of California system, where the college endowments aren't anything close to the Ivy endowments, it is more likely that full-tuition families pay for scholarships that other families receive. I am not judging this system, but pointing out how it works.
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Re: 529 contributions and future tuition costs

Post by sunnyday »

buckstar wrote:
sunnyday wrote:
I can see the argument for grants. for the other forms of financial aid, not so much. When I was in college I had a scholarship, decent size student loan, and did a work-study program. I don't see how Bogleheads paid for this but if anyone on here wants to pay off the remaining balance on my student loan, it will be fine with me :D
If college costs are so high that the only people who pay "sticker price" for it are the wealthy then they are, in effect, subsidizing the grants and scholarships that others are receiving. Subsidy = tax
Sure, there's some tax on the grants but there's a lot more to financial aid than just grants.
NorCalDad wrote:
sunnyday wrote:
buckstar wrote: The typical American doesn't pay for this. The typical Boglehead may have to pay for this. About 2/3 of students receive financial aid.
Financial aid comes in many forms - loans, grants (both federal and institutional), work-study, scholarships.

How would Bogleheads have to pay for this?
I wrote the original part, but the this to which I referred got omitted. The this was full-price tuition because Laura said she couldn't see how the typical American could pay for this. I said the typical American doesn't pay full tuition because 2/3 of families get financial aid. But the typical Boglehead may not qualify for financial aid.

Colleges are increasingly providing what is termed "institutional aid" in the form of scholarships. This is different from federal student loans, federal grants, federal work-study and state grants. Institutional aid largely comes out from the dollars that full-tuition students pay and the school's endowment. In the University of California system, where the college endowments aren't anything close to the Ivy endowments, it is more likely that full-tuition families pay for scholarships that other families receive. I am not judging this system, but pointing out how it works.
If the this refers to grants, I agree to a certain extent. However, some may have misinterpreted your post...I don't think there's some sort of stealth tax.

Say I have $500k in a 529 and my child gets into Princeton. I pay full price for my child but another student from the projects is accepted and receives 100% financial aid -- Princeton covers all of his financial aid in terms of institutional grants (Princeton eliminated loans from their financial aid in 2001). Would I feel I'm getting ripped off - no I know exactly what I'm paying for. Am I paying a bit more because of the poor kid getting a full ride -- sure. Am I envious of the student getting a full ride -- absolutely not. Do I feel that diversity makes for a better learning environment -- absolutely.

If an institution like Princeton needs to increase sticker price for tuition or decrease the amount of grants to help their bottom line, that's up to them. It's up to the consumer to determine if the price is worth it or if there's a better value elsewhere.
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Re: 529 contributions and future tuition costs

Post by JV »

sunnyday wrote:I plan to have $0 in my taxable account when my child goes to college
I found this curious, sunnyday. May I ask why (if you are open to answering)? Is it by design to qualify for additional college aid?
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Re: 529 contributions and future tuition costs

Post by sunnyday »

JV wrote:
sunnyday wrote:I plan to have $0 in my taxable account when my child goes to college
I found this curious, sunnyday. May I ask why (if you are open to answering)? Is it by design to qualify for additional college aid?
The main reason will be for tax efficiency purposes. Say I retire with 90% of my portfolio in a tax-advantage account (say it's in a 457b with no early withdrawal fee). I'd be better off drawing from the taxable account first to save on taxes. Once the taxable account runs out, I'll tap into my tax-advantage account.

If having $0 in taxable enables my children to qualifying for additional college aid that would also be a big plus.
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Re: 529 contributions and future tuition costs

Post by sls239 »

The this was full-price tuition because Laura said she couldn't see how the typical American could pay for this. I said the typical American doesn't pay full tuition because 2/3 of families get financial aid. But the typical Boglehead may not qualify for financial aid.
If you remove the portion of bogleheads that are older than those who have college aged kids, my guess is that even the typical boglehead of that sub-population is likely to qualify for some sort of assistance for college. MAGI for the American Opportunity tax credit doesn't begin to phase out until 160K MAGI for MFJ.

Quite frankly, I'm going to encourage my child to go into a field of study that offers generous scholarships. Many wealthy people have made endowments to particular departments of particular schools that drastically reduce the cost of attendance - be it geology or music.
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Re: 529 contributions and future tuition costs

Post by freddie »

FASF considerations are like tax considerations. You need to think about them but they are not always the most important factor and you want to make sure you optimize for the most money in your pocket. You also don't need to get your taxable account to 0. They give you like a 40k exemption.
sunnyday wrote:
JV wrote:
sunnyday wrote:I plan to have $0 in my taxable account when my child goes to college
I found this curious, sunnyday. May I ask why (if you are open to answering)? Is it by design to qualify for additional college aid?
The main reason will be for tax efficiency purposes. Say I retire with 90% of my portfolio in a tax-advantage account (say it's in a 457b with no early withdrawal fee). I'd be better off drawing from the taxable account first to save on taxes. Once the taxable account runs out, I'll tap into my tax-advantage account.

If having $0 in taxable enables my children to qualifying for additional college aid that would also be a big plus.
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