Ask the grumpies: Realistic numbers for a 529 plan

First Gen American asks:

What’s a realistic number as your max for 529 savings per kid? Is it 4 years at a state university or something different and why?

Disclaimer:  We are not financial professionals.  Please consult an actual financial professional with fiduciary responsibility and/or do your own research before making any life-changing financial decisions.

This is going to depend on a whole lot of things–where you think your kid will end up going, how much financial aid you think you’ll get, whether there are younger siblings, how much you can afford to contribute, and so on.

If you’re high income and you think your kid might go to one of your state universities, then yes, 4 years at a state university seems really reasonable.

I don’t like our state universities– our graduate students from our state schools (even ours) often come in thinking only in terms of black and white and multiple choice one right answer.  Students often don’t know how to use the library system because they never had to.  Many of them can’t write essays with topic sentences.  Our students from regional midwestern schools are generally better able to think in terms of shades of grey.  So… that’s not going to be an option for our kids.

We also have two kids, so anything leftover from DC1 can go to DC2.  Also, DC1 and DC2 have both skipped a grade or two, so it might make sense to just do a masters degree before going into the workforce just to be closer to a normal age for that.  With DH employed again, we’re back in the “not eligible for financial aid” category.  Not even at Harvard, which is particularly generous to high income parents.  (Here’s the Harvard calculator)

So what we did was try out a few calculators for various colleges that DC1 might be interested in going to.  Here’s some older posts on that.  Ponderings on college costs from 2015.  College savings are hard to plan from 2017.

I think I will revisit those posts…

DC1 currently has:  $253,277.50 .  DC2 has about $130,000 (we plan to re-start saving for hir once we know if DC1 will have any leftover).

I have assumed the full tuition cost of DH’s Alma Mater (a private “regional ivy”), which is around $55K tuition give or take, plus the calculator’s default for room and board.  I don’t think Harvey Mudd (our most expensive potential option) is going to happen.

This calculator says we should be saving about $500/mo more for DC2.  We’re going to wait on that.

This simple calculator says we should have a surplus of about $3K for just DC1.  If we do, it will go to DC2.

Basically, if we oversave for DC1, it can go to DC2, but if we oversave for DC2 then it is not as easy to deal with.  Someone has to use the money for some kind of education or we will need to pay a penalty.  Now, education could be a professional degree or a fun class for us, but I’d rather not have to come up with something in order to use up money.  It’s also possible that we could transfer the 529 to a child who could then use it for a grandchild, but we can’t predict the future and our kids may not have kids.  We could do something similar to transfer it to a nibling, but I don’t know that we have any plans to pay for our niblings and there are 6 niblings from two siblings so I’m not sure how fair transferring to just one person would be.  (I don’t think there’s a safe direct path to transfer to the relatives we are paying for and they’ll all be in their 30s and 40s by the time DC2 finishes college anyway.)  You can get money put into a 529 back without penalty if your kid gets scholarships for the amount of the unexpected scholarships.

So, to sum, for us we saved for an expensive private school for DC1 using a number of different online calculators (that take into account parental income) and then less than that for DC2 (who is 6 school years behind).  We have stopped at this point after doing a couple of lump sum contributions and will rejigger once we know where DC1 is going and how much that’s going to cost.  We have the ability to cash-flow things if necessary and can also take out parental loans if that seems like a reasonable thing to do.

As a reminder:  Max out your retirement savings first– 529 money counts for financial aid purposes but retirement savings does not.  If I could go back in time, I would have maxed out our retirement first.

Grumpy Nation, what is the max that you would save for your kids’ college?


10 Responses to “Ask the grumpies: Realistic numbers for a 529 plan”

  1. bogart Says:

    Hunh. We have not prioritized 529s at all because we’ve prioritized retirement savings (I’ll note that those will be entirely accessible to us during the time DC is in college, though mine won’t be when he starts — DH is already > 59.5, and I will be in DC’s junior year if he does the standard graduate @ 18 and go straight to college thing. I wouldn’t be averse to his taking a gap year.). My mom has set up a 529 for him that currently has about $40K in it (thank you, stock market returns…). But also, my employer provides a great tuition benefit. It’s not great as a floor, but works really well as a ceiling and would pretty much cap our college costs for him @ ~$120K if he took 4 years to complete a BA starting today. We’ll also expect him to earn and/or borrow to cover some of the cost of college (I paid about 1 year of the cost of just tuition where/when I went, but to be clear, inflation puts that amount at $15K now, not what a year of tuition would be, really, so some equivalent to that may be our guide. I’m sure it will depend on other things as well, like the state of the larger economy, DC’s plans/goals, etc.).

    All that said, this is more a denominator question for me than anything else — if we had more money lying around that we didn’t know what to do with, we’d certainly plunk it in a 529. I fully anticipate DC needing/wanting grad school, and we also have grandkids (my steps) the funds could be re-assigned to help. But that said, I have no regrets about maximizing retirement and ignoring college, partly for the reason mentioned (= we’re old!).

  2. middle_class Says:

    I am highly impressed that you saved so much for DC1!

  3. SP Says:

    With the penalty only being on the earnings, do you know how that is calculated? I’m wondering if one was worried about over saving, if you could start a newer account so the earnings are a lower fraction of the total, resulting in less penalty. I’m probably overcomplicated this, though. Your plan seems good!

    We have a small 529, but plan to work towards filling the mega backdoor roths each year over a 529. The money is then flexible for any usage, except we can’t use growth until we are old enough.

    • nicoleandmaggie Says:

      I do not know how the penalty is calculated! But that is an interesting idea.

      The mega backdoor Roth is (likely) a better use of extra money than 529s. Worst case scenario (ex. high interest rates on student loans) you could just stop contributing entirely to retirement and cash-flow more of college and you’d still be fine for retirement because of the previous savings.

      • First Gen American Says:

        I am also doing a mega back door Roth as I really don’t know how much I will need for the kids. There are too many unknowns at this point. My older son thinks he’s going to the state school but the honors engineering program is actually pretty tough to get into these days. My younger son is a decent athlete and smart so he’s another wild card.

        Up here, the tide is staring to shift away from the expensive privates. The cost delta has just gotten too wide for a lot of people when it’s 3x the price and doesn’t offer up 3x more salary or job prospects. I still think the top tier ivys are an exception (there is value there).

        I guess our stance is we support either (public or private) but if it’s private it has to have good name recognition, network and recruiting potential.

        I am amazed how many flyers we get from smaller private schools I have never heard of. (Those are a big no).

        Thanks for posting. I did prioritize retirement as well but recently realized one of us will be old enough to tap a 401k accounts if needed if he retires early, so I guess it’s all good. You have to be over 55 and it only counts towards your last 401K.

    • nicoleandmaggie Says:

      Apparently California imposes an additional tax because it’s special.

      • revanche @ a gai shan life Says:

        Reading that link made me snort at this: “So, you have several options for avoiding the 10% tax penalty on non-qualified distributions.” This was at the bottom of a list of penalty exemptions that included as the last bullet point “dies or becomes disabled”. Yes, let’s call that a strategy for avoiding the penalty. 😆

  4. revanche @ a gai shan life Says:

    I’m having a dose of regret that, though well intentioned, maybe I made the wrong call in starting JB’s 529 with lots of contributions 6 years ago instead of dumping all of that into retirement savings. Thinking back, it was probably because investing directly in a brokerage account to make up for my lack of 401k wasn’t on my radar. But what a nest egg that would have grown to by now had I known then what I know now.

    I’ve throttled back saving in the 529 dramatically so that I can focus on our retirement savings.

    We’ve only got the one for JB and don’t intend to open a second one for Smol Acrobat since they’re so far apart, I presume I can just roll it over to Smol when the time comes. Huh, it occurs to me that perhaps there’s a chance that JB might still be drawing on their half of it when Smol wants to use it… Well, that’s not likely. But I should check to see if I can roll over just part of an account to a new beneficiary if I have to pay for two kids at the same time.

    I’m also focused on retirement because I want out of here and also I just don’t have any good sense of what the future holds for all of us 12 and 18 years from now as far as college and incomes. Will we still be working and high (ish) income? Will we have managed to retire and still be high income? Or retired and moderate high income?

    Anyway. As far as how much, I’d like to have $300k in there for them to split down the middle. Without new contributions planned between now and 12ish years from now, $200k is more likely. I’m hoping we’ll be in a solid enough position to help cash flow any other needs. It’s hard for me to imagine stomaching more than $25k/year when I only paid $9k a year in college so when I looked at Berkeley for an example in tuition costs I nearly passed out.

  5. Ask the grumpies: How much is too much in a 529? | Grumpy Rumblings (of the formerly untenured) Says:

    […] our last ask the grumpies on realistic 529 numbers.  This post also has links to […]

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