Step 15: College Savings Plan

Every parent wants a fully funded college savings plan for their child. There are very few parents out there that have no desire at all to save for their child’s college education. I bet that every parent wants to have a college savings account even if they cannot for some reason.  One reason is you need to care for your own financial future first. But if you have the room, your kid will thank you (eventually).

We all want our children to have an easier go at life than we were afforded, right or wrong. Like the majority of millennials, I left college with a sizable amount of student loans. Debt that took me more than 10 years to pay off. Any amount of college savings my parents could have provided me would have significantly reduced my payback period. I want to fast track my child’s path to FI and a solid college savings plan is key.

College Savings Plan

Wait… I want to start at the beginning.
Link to the previous step – Step 14: Health Savings Accounts

NOTE: This post is mostly about the college savings plan as a step on the path to FI. It does directly overlap with the following two prior posts on “The Coast 529 Plan” and “My College Savings Story“. Feel free to read them if you want more details.

Just imagine if you had free college…

If nothing else, I would love to be able to give my son a jump start in life. Free of the burden of student loan debt via a college savings account.  Just imagine how much further along the path to financial independence you’d be right now if none of those funds went to paying off a student loan all those years.  Assuming you are already done paying it back.

The two main concerns with starting a college savings plan are how and how much.  Basically what type of account and guessing future expenses. You could pay for college out of pocket, from a taxable investment account, from an IRA, or not at all. I’ll mostly talk about the two most popular when we were setting up ours.  The Prepaid College Fund and the 529 Account were the top options when we set up our son’s account. Honestly both appeared to meet our needs.  In the end the 529 afforded the most flexibility in using the funds and amount.

Consult a professional here

It actually matters who the account holder is on the fund (the child is the beneficiary in all cases). It will affect the eligibility for need based financial aid when applying for college.  Funds in a 529 plan owned by the student or parent will lower the need based eligibility by around 5.64%. Funds in a 529 owned by anyone else like a grandparent could lower eligibility by as much as 50%.  Regardless of who owns the account, anyone can contribute to it. Make sure to set one up before a well-meaning relative does it for you.

As for the “how much” we eventually settled on a projected $60,000 balance by the time he starts college.  I’d like to pretend this was a highly scrutinized, data-driven forecast based on current and future college cost estimates but it wasn’t.  Both of us left college with roughly half that amount in student loans and figured giving him double was generous.  

Yeah, yeah. That is less than you thought

I fully understand the projected total cost of college in the 2030s is expected to be several multiples of that. I still feel it is reasonable.  First, funding a college savings plan is reducing my retirement account contribution each month. This should be viewed as a “secure your own oxygen mask before helping others” scenario. 

Second, having a known amount of money set aside for college should hopefully encourage him to keep the expenses down. At least what is in his power to do so (more on that below). Third, it is entirely possible that he may not even need the money. His career path choice or changes in the political environment as it pertains to higher education will effect that.  In the slim chance of this event, it’d be best not to overfund this account for obvious reasons.

$200 per month seemed reasonable

After deciding on the balance we desired, the monthly contribution amount calculated out to be $200.  This was added to the monthly budget to make sure it is accounted for and tracked.  You did add it to your monthly budget, right?  I know it is technically a balance transfer and not an “expense”. Treating it as one to makes sure it gets properly funded.

Saving $200 per month for 16 years growing at an average return of 6% results in a balance of ~$65,000.  Not a bad college fund for setting $38,400 aside over that time frame and allowing it to grow. Easy.  Case closed. Moving on, right? Maybe not.

Swerve incoming

I don’t mean to throw a wrench into things here but I will. This is just an idea for those of you slightly more adventurous. I came up with about 2 years into this college fund after finding Coast-FI.  I was doing the math one day on how much money would be in the fund in various funding scenarios.

If we doubled up on the payments we currently made there would be a lot more of course.  Then I wondered how many years I have to double up on contributions to still end up with around $65,000. The same amount I should expect in the base case scenario.  That was a far more  interesting personal finance problem to solve.

Financial modeling is sexy

I did the math and assumed the same 6% average return in both scenarios to keep it simple. I would only have to double up on contributions for five years to coast into the same ending balance.  Contributing $200 a month for 14 more years or $400 a month for only the next 5 years. Now this was a dilemma.  Over the course of the entire period, the base case involves me contributing $38,400. The double up Coast-529 case involves me contributing $29,800.

Boom. Savings… probably.

Front-loading more of the money in the fund to be in the market for much longer allows us to “spend” around $10,000 less on our son’s college education while, in theory, providing the same amount of benefit since the accounts will have roughly the same ending balance.

I’m not saying this is recommended or even feasible for everyone out there but definitely something to consider if you can fit that into your monthly budget.  When I first did these calculations, I was so excited I showed so many of my coworkers in the office.  I was hoping at least one of them would see the magic of compounding returns and how it can save them money on funding their college funds.  I’m sharing it here and hoping it helps at least one more person.

When I was your age…

I would like to pretend I had a “back in my day college was the same price as a night at the movies and I could work 4 hours a week at a part time job to cover the tuition” types of stories to share here.  Unfortunately I am a millennial and college was already very expensive.  I also voluntarily chose to attend a private university instead of one of the state schools I was admitted into and I’m sure that didn’t help.

I don’t have any rigorous data behind this but I believe there are very few students who pay the full tuition at the school they attend.  The figure I saw once was that around 90% of students receive some form of financial aid and that figure might be slightly higher if you include other non-financial ways of reducing the expense.  There are a lot of ways to lower the overall expense of getting a four-year college degree and the ones I will mention here are by no means a comprehensive list.  There are a lot of college-hacking websites out there dedicated to helping you find some combination of techniques to lower the eventual bill.

College savings hacks

College cost cutting hacks include the obvious ones like scholarships which can come directly from the school or outside agencies.  AP classes, IB classes, and dual enrollment can help you cut down the number of classes you need to take to graduate.  Similarly, online courses like Edx and Sophia.org allow you to take college level classes from home at a steep discount or free and transfer the completion credits to college.  Additionally, you can take CLEP exams to test out of specific courses in college to speed up graduation timelines.

Some students play a sport or club to get a merit based scholarship.  Having an employer pay for your college while you work is another great option for graduate degrees and retraining.  Often derided or overlooked is first attending a much less expensive community college to get your prerequisite course work done before transferring to a four-year school to graduate.  The diploma is exactly the same but you probably spent a lot less.

Change your focus

The bottom line is that it could make as much sense to focus on how to NOT pay for as much of college as possible along with planning on how TO pay for college.

Personally, while I did end up with my share of student loans, I did employ several of the aforementioned hacks to lower the overall bill even at a private university.  My college fund story starts by mentioning I had no financial assistance from my parents and they were very upfront about that with me for as long as I can recall.  Going to college and paying for it was always going to be my responsibility.

Setting myself up for success

In an effort to both increase my chances at getting into a good school and reduce the amount of time I would have to spend there I started taking Advanced Placement (AP) courses as soon as I could in high school.  Actually, the school at the time had a policy that no students below junior year of high school could take an AP course so several of us banded together and petitioned the administration to let us take one our sophomore year.  After that success, I ended up completing around twelve AP courses before graduating high school which was the equivalent of around 50-60 credit hours of college coursework.

I would have probably preferred dual enrollment classes at a local college because they might have been easier to pass and involve nearly guaranteed credit versus the interpretability of the AP exams.  Unfortunately, I participated in several sports teams in high school that had practice after school when the dual enrollment classes typically occurred.  It all worked out in the end.

I’m in…

As I hoped, the number of AP classes I took coupled with the GPA bump you got from taking those classes got me into all of the schools I was interested in attending. One difference was I had some leverage that other students possibly didn’t in negotiating my scholarship offers.  It isn’t mentioned much at all but you can negotiate scholarship offers if your situation is not the cookie-cutter college experience.  I was offered a 4-year scholarship which sounds great at first but remember from above I already had enough college credits to functionally be a junior so four years worth of scholarship just didn’t make sense.

Wait… you can negotiate that?

I knew at the time that I wanted to go straight from my undergraduate degree into my graduate work even though that was an added expense up front.  Eventually I contacted the school and asked them when I graduated in less than four years if they would be willing to apply any unused scholarship money to my graduate school.  They agreed and that is how I was able to get a bachelor’s and master’s degree from a private university for roughly the cost of one year of graduate school in student loans.

Always ask. 

The college I chose to attend could have said no but I asked anyway and saved a lot of money in the long run.  To make myself feel better about attending a private college in the past I did the math on if I would have saved money regarding the relative expense versus a state school and didn’t find a huge difference.  Even at the higher tuition cost, the combination of AP credits and a scholarship rollover into graduate school caused the college expenses to even out.  It was close enough that I can sleep at night knowing I didn’t significantly overpay for my college education.

TL;DR

Determine if you want to save money for your child’s college expenses and what amount to save.  Open a 529 college savings account and contribute accordingly to meet your goals.  Stack as many ways to reduce the cost of college as you can. The parent should be the owner of the account for FAFSA aid eligibility reasons.