The 529 College Savings Plan is one of the best ways to save for college. But most people aren't taking full advantage of them. And I'm not going to lie - I'm one of them.
The idea of a 529 College Savings Plan is great: you can contribute money into an account and it will grow tax free to someday pay for your child's education. And you can contribute a lot of money too (up to $300,000 in most states). That's not where the trouble arises.
The real trouble comes from rising tuition costs and how much every "college savings calculator" says you need to save for your child's education. According to The College Board, the average cost of a public 4-year college in 2015 was $9,139 for in-state tuition. The average cost for a private college was $31,231.
When you start plugging those numbers into the college savings calculator, suddenly you're supposed to start saving over $500 per month for your child. Then, add that into your own savings for retirement, and you're not going to have anything left for yourself each month!
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That single amount gives me sticker shock each month when I think about saving for my child's college education. But it's also an important reminder of why everyone should follow the Order of Operations For Saving For Your Kid's College.
(Y) YOU: You have to make sure your own financial house is in order before you try to save for your child's college. If you can't make rent, or buy groceries, there are bigger issues to fix first. However, the YOU bucket also includes saving for your own retirement and making sure you have an emergency fund. I've said this hundreds of times - you can't get a loan for retirement. Make sure you save for yourself first.
(E) Education Savings Accounts:​ If you've saved for yourself, next you can save for your child in Education Savings Accounts, like the 529 Plan.
​Part 2 of that "scary" number that you need to save each month for your child's college is that number is based on saving 100% of their college costs. As a parent, you don't need to pay for 100% of their school. Or, maybe you'll pay for 100% of their public in-state tuition, and the rest is up to them. Or maybe you'll just have a target savings number, and the rest is up to them.
It's simply important to remember that you don't have to save and pay for all their college. It's THEIR college - not yours. Plus, there are tons of ways for them to find help paying for school, from finding scholarships, to getting student loans.
With these assumptions, you should be saving about $96 per month for your child's college, or $1,151 per year. Let's see how that breaks down.
Fidelity also has a great free calculator that allows you to determine how much your need specifically for your situation. They leverage many of the same assumptions we do above, and agree that you don't need to save 100% of your child's college education expenses. Check out t﻿﻿heir college savings calculator﻿﻿ here.
From the results, we can conclude that the goal for most people saving for college should be to have between ​$37,328 and $245,427 saved in the account. This is a huge range, no doubt. But remember what "low end" and "high end" mean.
Parents should also remember that, even when saving for private school, many students who attend private schools get discounted tuition, or receive scholarships to offset the "real" tuition price. So, even that high end number might not make sense when saving for college.
In this scenario, the low end 529 plan will be able to pay out between $9,600 and $10,000 per year, for each of the 4 years of school. Given that the college costs will rise, that should be about 50% of a 4-year public school tuition in 18 years.
What many people don't realize is that you can invest in almost any state 529 plan. For some people, it can make sense to use your own state's plan to take advantage of the tax deduction - but not all states offer tax deductions on contributions (notably California).
If the state doesn't matter, the next things to look at are performance and ease of saving. For performance, you want good performance for low fees. For ease of savings, we look at whether the plan can be connected to savings programs like College Backer.
SavingForCollege.com ranks the best plans every year, and you can find the 529 plan rankings here. In 2016, the best ranked 529 plan was offered by USAA. We love USAA (and use them for many products and services). This plan is great on performance, and it also connects to Upromise to help you save.
You can sign up for the ﻿USAA 529 Plan here. We also have a full list of the best places to open a 529 account here.
1. Save all of your child's birthday and holiday money. In many families, kids receive money from their grandparents, aunts, uncles, and more. I would estimate that the average kid receives at least $200 per year in gift money. If you saved that, you're 20% of the way to fulfilling their annual 529 contribution.
A great way to do this is to use a service like College Backer.
2. Look at Upromise by Sallie Mae. This is a free service that is designed to help families pay for college by simply doing their normal shopping. Upromise offers cash back rewards for linking a credit or debit card and using that card at participating retailers. You can earn anywhere from 1% to 25% back at different retailers. Upromise says that some members are earning at least $1,000 per year - that's almost everything you need to fully fund a 529 plan. UPromise is easy to sign up for - check it out here.
3. Focus on earning more money. Instead of looking at where to cut in your budget, ask yourself, how can you add $100 in income to your budget? I'm a firm believer that anyone can earn an additional $100 per month, and what a better way to put that extra $100 to use than by funding a 529 plan for your child? If you don't know where to start, check out our list of over 50 ways to earn extra money on the side.
We did not contribute to a 529 plan as we lived on one modest income so I could stay home. We have used UPromise for 11 years and have accumulated several thousand dollars of free money for college. I also put all my Ebates checks into my daughter’s savings account. Any money we did not expect has gone to her.
One thing I did was make her a deal. I agreed to pay for the closest major reputable university tuition in full. She is free to use that money wherever she goes, but it is up to her to consider return on investment, affordability, grants and scholarships etc. This has been very successful. Instead of simply looking at the cost of attendance posted on many school web sites, she has contacted financial aid and requested lists of grants and scholarships along with the what it takes to qualify. She is 15, so at this point, she still has time to work on adding to her college resume. Most of these colleges, especially the private ones, have been more than willing to give her all of the requested information plus additional assistance should she need help with applications, essays, etc. She is learning to think outside the box to reduce cost on the front end through dual enrollment while in school and other things to prevent going into debt in the first place.
I think you’re doing so much right! Nice job saving thousands with Upromise – it’s such a great service. Also, good call on using your Ebates rewards checks, that’s a great trick to boost your savings.
I also think it’s important that you have that conversation early (which is sounds like you did). A lot of parents leave the “how much you have for college conversation” as a surprise, and that just disappoints their kids.
You must be so very proud! Your daughter sounds amazing and her tenacity will certainly take her far in life! Your comments have been helpful as a new mom also trying to find tricks to save a little extra. Thank you!
Thanks for this guide. I’ve been doing only $30/mth for each of my girls but started when they were born. Still, I know I need to move it up to around $100 each for them, but it’s hard when you have 3!
I like the way you broke it down into only having to worry about paying half of the (state college) expenses, and they can hopefully supplement with loans, scholarships or getting a job. Thanks for the resource!
If we’re only saving for tuition and fees, we’re only saving about half of what will be needed. The College Board website linked above shows that average cost for Tuition & Feels plus Room & Board is currently around $20,000 for a public 4-year institution. We can tell our kids to live off campus, but (a) a lot of colleges force students to live on campus for at least their fist year, (b) depending on the area it may not be significantly cheaper to live off campus, (c) living off campus can reduce one’s financial aid package, and (d) our kids then spend a good deal of their time shopping for and preparing food and getting to and from campus, rather than studying.
Thank you for such a well written, uplifting and logical article on 529 savings. I feel less overwhelmed and more optimistic having read it! It even has helpful and great comments. Thanks Melissa for the ebates idea!
Thanks for posting this resource. It looks like you are also updating the numbers for inflation and increased costs over time. I have been using this as a guide for my children’s 529 accounts. Both sets of grandparents contribute according to their means, and we try to fill in the rest. One child is 7 and the other is 4, and so far, we are on track for 50% of in state tuition. We probably should be paying off our own student loans more aggressively, but I really don’t want our children to struggle with student loan debt the way we have. I am 45 and my husband is 50, and we are a single income family. Although our families paid for our college (through savings or military survivor benefits), we both racked up a lot of debt in graduate school and we are still paying it off. Again, thanks for posting this. It’s very helpful!
Yes, please save for yourself before your children! Your children have countless options to pay for school – but you can’t get a loan for retirement.