The 529 Dilemma

The 529 Dilemma

I graduated from pharmacy school in 2011 with no student loans. That’s right, I came out 100% debt free so it’s definitely possible to avoid Sally Mae.

Out of high school I received a scholarship that paid 100% of my tuition and fees for four years of undergrad studies. Since I got into pharmacy school after two years, the scholarship continued to pay for the equivalent portion of undergrad fees for the next two years. But the reason I graduated debt free was in large part thanks to my parents.

Outside of that big scholarship I had a few thousand dollars in savings bonds and earned a few more smaller ($300-$500) scholarships and the rest was mom and dad.

There’s no doubt that coming out of college without debt was a huge jump start on our road to FIRE. My wife’s parents also paid a huge portion of her pharmacy school expenses and we only had about $20,000 of her loans to pay off once we graduated. We both feel very fortunate to have not been saddled with six figures of student loan debt like some of our colleagues.

We made the decision prior to having kids that we would pay for their college education. I often hear people say things like “I’m going to make my kids pay for at least a year of college because…” or “I had student loans so my kids will have them too.” I just don’t understand this mentality. I want to be able to set my children up for a lifetime of success. It’s a gift that we both received from our parents that we want to pass on and we are in the financial position to do so.

When have you saved enough?

I’ve read a lot of blog posts and articles on this topic. At this point I’m trying to decide when I should consider my kids’ 529 accounts complete. However, “complete” can mean many things. Is it enough to fully fund 4 years of college or maybe even another 4 years of grad school? Or do you plan to cash flow whatever isn’t covered by scholarships and the 529? And then if you decide to cash flow some, how does that impact your ability to retire early?

I’ve read some who consider a fully funded 529 to be $100,000. Even though the beneficiary can be changed and whatever money is not used can be passed on to another recipient, some people might be concerned with over-funding the account. The difficult part of saving for college is that the window for growth is significantly shorter than say saving for retirement. That means less time to fund and less time for compound interest to work its magic. And as your child gets closer to graduation you’ll likely consider shifting to a more conservative allocation.

We started a 529 account for each kid the month they were born and have contributed monthly. Now that our mortgage is paid off I would like to focus on beefing up each kid’s account. I really like the Vanguard college savings planner tool to help with planning. You can plug in current values and saving rates and how much you plan to contribute. The thing I really like is that you can select a specific college and it uses the current cost of tuition and you can adjust how much you expect tuition to increase. I’d recommend setting the percent you plan to cover to 100% to get an idea of your shortfall.

Our household situation

Currently kid #1 has $20,000 in the account. Based on a return of 7% we would need to double the value to $40,000 to be considered 100% funded.

Kid #2 has $9,000 in the account. Assuming the same 7% return and shooting for 100% funding we need this account to be at $38,000. Which means right now we would need $49,000 in additional savings to be considered fully funded for both kids.

*Update* Whoa! That’s WAAAYYYYY more than I thought we would need. 30 minutes ago before I ran these numbers I thought maybe we would need half that amount.

Our current plan is to add large monthly deposits into each account (we are currently saving $250/month/child) and then move on to saving more in our joint taxable account. I’m not sure that we will go all the way to fully funding at this point the 529s at this point. It’s probably more realistic for us to get to $30,000 for kid #1 and $20,000 for kid #2 before we have to start saving for vehicle replacement.

So what’s your view on this topic? Do you plan to save 100% for kids’ college or will you take the approach of save some now, cash flow the rest later?


2 thoughts on “The 529 Dilemma

  1. We fund a 529 for our child. We believe that we *need* to set up our kid for success. Do we want to fully fund (whatever that will mean in another 13/14 years!) all college expenses? No. There can be sources of cash flow other than designated, tied-up, higher-ed account. We also different fund 529 accounts for nieces and nephews. For a different perspective you might want to read this up by Jeremy => https://www.gocurrycracker.com/why-gccjr-has-no-529/

    1. It’s definitely a debatable topic. I think it’s important to at least consider the potential problem of overfunding. If that were to happen I would consider it a good problem to have. And we could always pass it on to grandchildren and create a lasting legacy. But it’s totally something that makes he hesitant to build the 529s up over say $50-60k of contributions at their current ages.

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