Lazy Man and Money

529 Plans: 29 Thoughts for 5/29

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Happy 529 Day! You probably already know that’s a college savings plan.

529 PlanI first started looking into college savings plans in 2007, when my nephew was being born. I wanted to give him a little head start. I also like the idea my gift would be multiplied thanks to the power of compound interest.

Unfortunately college savings plans can be a little difficult for a new parent (or uncle) to understand. This lead to my How to Choose a 529 Guide.

I put in a little money to seed the account and added more on birthdays and holidays. My nephew got himself an awesome little sister, so I opened up an account for her too. Grandma occasionally pitched in some money as well.

Today, their accounts have a little less than $7,000 – more than half of it from market gains. Hopefully that will buy a few hours of lecture by the time by the time they are in college.

Nowadays, we’re a little more focused on saving for our own kids. We’ve got some work to do on that front, but we do have $20,000 saved.

That’s enough about our situation though. Let’s get into 29 thoughts of 529 Plans on 5/29.

1. When money from a 529 plan is used for a qualified education expense, there are no taxes to pay on the investment gains.

2. Unfortunately, it’s difficult to get great gains on a 529 plan since they are typically compounding for less than 20 years.

3. You might be able to reasonably double your money twice in that 20 years. Thus one dollar invested at a child’s birth may be worth four after high school graduation. This assumption uses the rule of 69 with 7-8% investment growth.

4. Thus, if you put one year of tuition in a 529 account at birth, it could fund their entire college education. (Unfortunately, very few people have tens of thousands to invest when a new child is born.)

5. 529 plans are run at the state level. As soon as you are done with this article, you’ll want to look at your own state’s specific plan.

6. Some states give you an extra incentive to open a 529 plan. My state, Rhode Island, gives a $100 grant if you sign up for a 529 plan when your baby is born.

7. I used this idea to help motivate a blogger friend to start a 529 plan. I offered $25 and a couple of other bloggers joined in.

8. Some states allow for a tax deduction or credit for saving in a 529 plan.

9. Some states have better investment options than others. When I lived in California there was no tax incentive for me to invest in the state plan. I decided it was best to invest in Ohio’s plan which had Vanguard funds with low expenses.

10. 529 plans can be rolled over to a new beneficiary such as a child. This can be done indefinitely, possibly creating a family legacy of education funding and compound interest.

11. 529 plan money can be used to buy computers. See this IRS page for more details.

12. 529 plan money can also be used to buy computer software subject to the same IRS rules mentioned previously.

13. 529 plan money can even be used for internet service.

14. 529 plan money can be used for tuition at private or religious elementary or secondary schools.

15. 529 Plans can be used for community and technical schools

16. 529 Plans can be used for some nontraditional schools such as the Golf Academy of America, the commercial diving program CDA Technical Institute, and the Le Cordon Bleu College of Culinary Arts. Yes, golf, diving and cooking can qualify.

17. 529 Plans can be used for online schools

18. 529 Plans can be used for hundreds of international schools. Check with the government searchable database first.

19. 529 Plans can be used for online schools. Again, check with the government searchable database first.

20. There’s a limit of $10,000 per year for elementary and secondary use.

21. If your state has a tax deduction for 529 plan contributions, you may want to funnel money through a the plan to save on your state tax.

22. If the beneficiary gets a scholarship an equivalent amount of the money in the 529 plan can be used penalty free. However, taxes on the gains will apply.

23. Alabama and Illinois have a 529 Rewards Visa card where you can earn 1.529% rewards on your spending. A small annual fee may apply. As always, it’s best to pay off your credit cards every month to avoid the huge interest charges.

24. One of best ways to grow a 529 is simply to create an automatic monthly transfer from your income. This “paying yourself first” creates forced savings.

25. A wealthy relative can use a 529 plan to circumvent the gift tax by “superfunding” 5 years of contributions ($70,000) in one year.

26. Almost 300 private colleges and universities belong to a Private College 529 Plan. It’s the only 529 plan not run by a state and it allows you lock in tomorrow’s tuition at today’s rates. It’s not an investment.

27. However, if you plan to contribute to the Private College 529 Plan and go to a school that doesn’t participate, you may have done better investing in a regular 529 plan.

28. It’s possible to combine a Private College 529 for tuition and a regular 529 for other expenses such as room and board.

29. As 529 plans are intrinsically linked to taxes, please consult with your tax advisor before implementing anything mentioned here.

If you’ve made it through all 29 thoughts, I hope that you’ve been inspired to investigate at least a few of them further. Let me know in the comments if you have followed any these down the rabbit and what you’re experience with 529 plans are.

How Much Do I Need to Save for College?

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A little over 6 years ago, I became a dad. Less than a month later, I wrote an article about saving for college.

Yes, I’m weird.

I thought I’d do something I call “Then and Now.” The idea is to look at an old blog post, review it, and update it for now. I feel that the value of a blog is the journey. Otherwise, you might as well just create a website. Here we’ll see how things have changed in the first trimester of our college financial planning. I think we’ll find that not only has our family has changed, the world has changed, and my knowledge of the saving for college has changed.

Life would be boring if nothing changed over six years, right?

Let’s get started with my 2012 view. Then we’ll get to my 2019 view.

Then: How Much Do I Need to Save For College (2012)

College Advantage Savings Growth

That’s a question that my friend Kevin asked me probably around 3 years ago. It was a simple question. He had recently had a son and he wanted to put aside money to cover his education. Kudos to him for starting early. The question lead me to write this article: Saving for College – An Exercise in Depression. In hindsight, it was a total cop-out as I never did answer his question.

Today, I think I’m going to do better… hopefully a lot better.

I have a vested interest this time around. My own son is four weeks old today and I’m in Kevin’s shoes (not entirely, but I’ll get to that the end). I got in reminder about all this from CollegeAdvantage, the place I determined had the best 529 plan for my niece and nephew. Specifically their newsletter had this image on the right (click for a larger view). The part that caught my attention is the bottom that assumed annual deposits of $2,400. For all practical purposes (minus some interest compounding) that’s $200 a month.

This didn’t answer Kevin’s question, but goes down the right track, giving me a good estimate of how much I’d have if I saved roughly $200 a month. However, it didn’t tell me how much college was going to be when Little Man is 18. Without this information I really can’t know how much to save.

When in doubt, I fire up Excel and get nerdy with some math. Here’s what my Excel spreadsheet looks like (click for larger) and I’ll explain what I did here:

College Costs

On the right you’ll see three headings with numbers below them, “Monthly, Interest, and College Increase.” These are the main variables that I’m playing with here. If I save $674 a month (more on that seemingly random number later) and earn 6% interest I’ll have the amount at the bottom of the “Interest” column under the Savings heading. The Interest column represents how much money I’d have at the end of year assuming deposits and interest. I could have titled this column better, but that’s the beauty of Excel, I’m getting to the numbers quickly. For fun I’ve totaled up the amount of actually cash I’d be putting aside by saving $674 a month. So putting $145,584 over time yields me $350,957 when Little Man is 21. I didn’t factor in taking the deductions out of this to actually pay for college, so there’s room for improvement here. It is important to remember that this is an estimate and there’s no guarantee of earning 6%.

Now let’s turn our attention to the right column of College Costs. Using the “College Increase” value, I can estimate how much college might cost Little Man at age 18. The 4% is just a best guess. Ideally, I would know how much college costs are expected to go up over the next years. Perhaps some research group has a good answer there. I settled on 4% because quite honestly, if you put a 8% number in there the last year of private college is $212,000. I don’t see that happening. Even at 4% the last year being $96,000 looks pretty daunting. However, in 18 years it might not be. I’ve totaled up the last four years of the college costs and you can see that public college is likely to cost around $184,500 with private school costing $363,000. Now it becomes a little clear where that $674 a month came from… that amount gives me the $350,000 range that covers 4 years of private college.

The last piece to the puzzle is where did I get the information for the public and private school costs to start with right now? The answer is Collegeboard’s annual estimates. They did all the heavy lifting give me a number for how much an average public or private college would cost with most of the typical fees rolled in.

So now that I’ve gone through all this math, let me make things easy for you. Saving for College has a College Cost and Savings Calculator, which is dead simple. You just put in a child’s age and it tells you a number that you need to save. I put in $0 just now and it came up with a $602 number that I have to save each month. From there, you can adjust the scenarios just like I could with my Excel spreadsheet. If I had seen this calculator first, I would have skipped the spreadsheet, but the spreadsheet does give me helpful checkpoints. When I did it a couple of weeks ago, I believe that number was $674. When I plugged that $674 number into my Excel spreadsheet things started to fall into place.

The calculator from Savings for College also has a lot of other valuable information. For example, it assumes a 6% cost of college increase using historical information. The 4% assumption in my spreadsheet looks to have been an underestimation. If that stands true, the last year of private school for Little Man is going to cost $143,543. Zoinks!

There are still a few different factors at play here. Going back to the CollegeAdvantage chart, there are taxes to consider, but 529 plans can help with that. If you are saving in a regular brokerage account, who knows what long-term capital gains are going to be at that time? Again, you just take your best guess and adjust as you get closer.

Now for the fun part… I get to throw most of this research in the trash. It turns out that Little Man appears to be eligible to get free public education thanks to my wife’s GI Bill with the military. I knew that it was a tremendous benefit, but this exercise has put it in a whole new light.

Now: How Much Do I Need to Save For College? (2019)

Kevin’s simple question about 9 years ago as his son was born is still an important one: How Much Do I Need to Save For College? Did he need to put aside $50, $100, $200, or even $500 a month to cover his new son’s college expenses. At the time I got depressed doing math of saving for college, as college costs were going up as fast as the average stock investment was projected to. The end result: Expecting compound interest to help your college investment seemed doomed to failure.

It’s important to note that he viewed paying for his son’s college as a strong financial goal. Living in Silicon Valley at the time, I believe he had the income flexibility to put significant money towards that goal.

Then (2010 and 2012), I took the question on face value. It’s an interesting mathematical question. My thought was, “Let’s do some objective number crunching! Yum!”

Now (2019), I feel it is more necessary to talk our feelings about college costs. For this article, I’m going to put aside the question of whether you should or shouldn’t pay for your kids’ college. Kevin felt strongly about paying 100% of the costs. I feel strongly about helping, but also that the kids have to have some skin in the game. Other people may not be in a position to help at all. We all come from different backgrounds and have different philosophies on this topic.

Instead, I’m going to do my best to work with the objective math of paying for 100% for college costs. You can always adjust it to suit your parenting style/philosophy.

Then (2012), we had my wife’s GI Bill that would cover Little Man’s public college schooling for 4 years. It even covers some living expenses. Now (2019), we have two kids. We have to split the benefit between them. That means there’s a gap that we have to save for. The original question was for one kid… and that easy answer was the GI bill. Now things are different.

In 2015, when the boys were age 2 and 3, I put together a spreadsheet to estimate their education costs in high school and college. We send them to a private prep school due to a large discount we are eligible for. We plan to continue to do that through the 8th grade. At that point, we’ll have to navigate the high school waters. Many of children in the class will go to some of the best private high schools in the country which cost as much as some of the best colleges. I decided to include that into the numbers, but I don’t think that’s feasible without some kind of scholarship. For the purposes of this article, you can pretend the high school component doesn’t exist. (Again, it’s best to customize to your specific situation and goals.)

Here’s what the numbers look like for kid 1 (the oldest):

Education-Kid1-2015

Remember these numbers were from 2015. I used the average cost of public and private college that year and assumed a 3% increase each year. Years ago, I thought it would increase at 7%, but those numbers just got really, really crazy.

Here’s kid 2. Since they are almost the same age the numbers are pretty close:

Education-Kid2-2015

Here’s the summary that’s going to be the glue that makes the first two tables make some sense:

Education-Summary

I’m going to start with the summary first and work backwards. The summary adds up the high school costs (the four years in bold in the high school column) and the college costs (the four years in bold in the average college column). Because I don’t know if if the kids will go to public or private school, I averaged the costs of the two. The college cost is divided in half which is an estimate of using my wife’s GI Bill. I then added up those numbers coming to around $300,000 for each kid (one a little more and one a little less).

Once I knew that my goal was to save $300,000 each, I could play with the monthly savings number and projected investment gains (estimated at 7%). It turns out that I needed to put $625 for kid 1 and $600 for kid 2 to come up with those kind of numbers. That’s a lot of money, but remember that the high school would be the expensive part, and I don’t see it happening (my wife doesn’t necessarily agree with me on this).

If we were only concerned with college, we’d have a much more manageable amount of around $220 for each kid to cover the estimated gap not covered by the GI Bill.

Of course 2015 numbers aren’t relevant. I’ve updated the same three charts above for 2019.

Kid 1:

Education-Kid1-2019

Kid 2:

Education-Kid2-2019

Education Summary

Education-Summary-2019

One thing that stood out to me is that the costs of college didn’t go up 3% every year as I expected. Overall, they went up 7% in the three years total. I had expected it to go up more than 9%.

This math assumes that one were to start saving from scratch now.

How Much Do You Need to Save for College?

This is a lot of math that is very specific to our family and our financial situation. I don’t expect the numbers to mean much to you.

What I’d like for you to take away from this is the process. It isn’t perfect. It makes a lot of assumptions that will eventually be shown to be wrong. However, there’s value in doing this exercise at least every few years. I learn something new every time I do it. Finally, I continue to get more data and that helps my planning over time.

Have you planned how much you need to save for college? Has the plan changed over time? Let me know in the comments.

College Costs: What We Owe Each Other

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I read a very thought-provoking article the other day from Early Retirement Dude: I don’t think we owe college to our kids. Does that make me a bad father?.

(Hat tip to Justin of Root of Good for sharing it on Twitter.)

I mostly agree with the title (more on this later), so I jumped into the article. You can click the link above and open it in a new window, because I’m probably going to be quoting some stuff.

It starts off powerfully and I think almost anyone would agree:

It’s not that you owe your kid a fashionable coat… it’s that you owe her a warm one… Anything beyond that’s a choice, not an obligation.

This is a cool illustration of needs vs. wants. This is an interesting discussion when put into the context of college. I usually think of this in terms of: My children may want to go to a small expensive liberal arts college, but their college needs may be met by our current state school (University of Rhode Island currently.)

The idea college isn’t a need is today’s world is something I hadn’t considered. I feel like a college degree nowadays was like a high school diploma of the generation before me. It’s hard to really say what a need is when it comes to education, but I think it’s best to have all the options open. Not having a college degree closes a lot of doors.

A few sentences later this hit me hard:

You don’t owe your kid college… you owe her a good start in life. Assuming the two are the same thing might be more harmful than helpful to both of you.

Doh! I had considered the two the same. My next thought is that this thought is going to be hurting my children. Fortunately they are 5 and 6, so I’ve got about a decade to think about this and solve the problem. (Of course, it will be here in a blink of an eye like the first 5 years.)

I don’t see where this harm would come from in most cases as long as people make reasonable choices.

Nonetheless, I’m excited to read the rest of the article, because Early Retirement Dude is going to give his ideas on what a “good start” is. I feel like my view is very basic, so I’m looking forward to seeing a new viewpoint.

We move on to the next section:

“A successful career isn’t the same as a successful life… We’ve all heard about the guy who’s miserable in a high-paying job.”

I think a successful career should be part a successful life. Who wants to feel unsuccessful roughly half of his/her waking life? That doesn’t necessarily mean that success is determined by a high-paying career. It could mean that you found fulfilling work. And finding that fulfilling work is probably easier when you have the option to do things that you want to do… and maybe change your mind as you go along.

I believe that a college degree helps with that.

It’s only been one generation since college became perceived as the gateway to success.

What’s been diminished, then, is the idea that the gateway to a ‘better life’ is ability and not pedigree. When hiring a candidate for a sales position, would you rather find a recent college grad with a degree in sales, or a candidate with a ten-year track record but no college on his resume?

This section changed my view of where the article was going. I just don’t buy these kinds of arguments. For example, it’s only been one generation since we felt the need to have internet access. A lot can happen in a generation with how fast news, information, and people can travel now. What happened in a previous generation might not relevant in the next one.

I think society has changed and we have to adapt to it. While society may need to rethink the value of a degree vs. experience, we can’t gamble our loved one’s future on society doing so. It seems that the vast majority of people are getting degrees and that sales position is going to have someone with the same or more experience AND the degree.

Sending your kids to college requires them to submit themselves to unreasonable strictures imposed on them by the university system.

I’m not sure that all colleges have the unreasonable strictures imposed on them. Some are pretty liberal. However, I’d say that every public high school and a lot of careers have these as well. It sounds a little unfair to single out college for this.

Not all kids can handle college

This is true. However, if this is the case then the question of whether you owe college to the child is trivial. Do you owe a two year old a family heirloom hunting knife? No.

If you’re carrying credit card debt or any other debt above student loan rates, paying tuition is a terrible economic inefficiency.

This is very true as well. In this case, I’d say that if you can’t afford to pay for college, you don’t owe it. I hope there aren’t too many people running up credit card debt to pay for their kid’s tuition.

Many of us will have to balance taking care of our kids against taking care of our parents.

This is a good point, but again covered by if you can’t afford to pay for college, you don’t owe it.

To wit: if you pay for your kid’s college you can forget about ever retiring yourself.

It is possible to pay for your children’s college and retire yourself. People have done it. Seriously.

It’s usually well-settled personal finance that you pay for your retirement first. As the saying goes, “You can’t get loans for retirement.” (Well maybe a reverse mortgage.)

In the end, all these last three financial situations are particular on your personal situation. Early Retirement Dude supports his points with a lot of good data about the average person in the situation. The good thing is the average may not relevant in your situation. Early Retirement Dude himself points out that he doesn’t have to take financial care of his parents.

The good thing is that you aren’t a statistic. Also, chances are, that if you are reading this, you are probably doing better financially than most.

So… College: What We Owe Each Other

With the background information covered, we can move forward.

The first thing I learned is that the question of whether a parent owes college is only relevant if:

  1. College is the right option for your child
  2. College can be afforded

The first one requires a subjective personal assessment of your situation. I can’t help you with that.

The second one is a complex personal finance question. It could be a good one to work on with your financial planner. That planner may be able to suggest a certain range of money you could afford for college. That could help pin down the college options that are a good fit.

If college is the right option and it can be afforded, I think we finally get to the philosophical question:

What do you as a parent owe your child when it comes to college?

When I was going to college, our family fortunately dodged this discussion by getting a full scholarship to an excellent school. I suspect there would have been an option of getting some help from my mother (my father had died a few years before), if I went to a public school. It could have been more, perhaps even 100% of a private school, but I want to say that this was a minimum expectation from me.

I’ve put a lot of thought about this question when it comes to our own kids, ages 5 and 6. However, my wife’s GI Bill may cover half of their college expenses if they choose to go to an in-state public college. For other colleges, it is a set amount of money per year. It’s a tremendous benefit. In a lot of ways, it could “take us off the hook” for what we owe our children.

That’s not to say that we haven’t saved some money in 529 plans. It’s just not going to be very much in comparison to what the financial planners tell you to save. If we don’t add to it, maybe it will pay for one more year for one child. That would cover 5 of the 8 years of school between the two children. We may also be able to save more, but we are investing it now in private school. (We qualify for a great scholarship.)

Hopefully there’s an educational snowball. My (completely based on nothing scientific) feeling is that if you get children started well early on, it will pay dividends down the line.

So what about the other three years? That’s where they are going to have to pick up the slack. Hopefully they’ll get scholarships. Perhaps they’ll get loans. Perhaps they’ll work. That’s what they owe us when it comes to college… having some skin in the game and doing the best they can.

In any case, I think there’s an expectation to have a clear, financial conversation about college. I’m not sure when those kind of conversations start, but I think I’ll drop dad hints for quite a bit, so they’ll have expectation.

Again, these are very early thoughts. My thoughts are likely to evolve over the next 10 years as we approach blastoff.

What are your thoughts about what we owe to each other when it comes to college expenses? Let me know in the comments.

P.S. The title “What We Owe to Each Other” is taken from The Good Place, which was taken from the real book.

Why is College in America So Expensive?

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I’m going to be at FinCon this week. For those who don’t know, FinCon is when many of the personal finance bloggers get together to network, learn, and just be around their own people.

It’s always the busiest time of the year for me. This year, I’m juggling bringing the family as well. On the day we get back, my wife may turn around and fly 90% of the way back to do a 2-week Hurricane Florence deployment. It’s a good thing it’s not my 6 year old’s birthday, their dentist appointments, or school picture day on that first week. Oh wait, it just happens to be all those not-so-oddly-specific things.

Aside from that, I’m super-excited for the closest I’ll ever have to a happy version of “Bring Your Children to Work” Day. I’m sure it will be much better than the alternative, “Turning Over a Tenant” version of the day.

P.S. If you are a blogger at FinCon and want to make some friends, just say almost anything related to Pokemon with my kids around.

I still got a lot of loose ends to tie up before I go, so today, I’d like to tackle something short and easy:

Why is College in America So Expensive?

Hmmm, that certainly doesn’t seem short or easy. In fact, it’s neither. The Atlantic recently wrote around 3000 words on that topic.

It’s a very good read. If you have the time, I suggest you just dig in.

It took me a few days to read over a number of sittings. (I generally work with very small blocks of time.) Here’s briefly what I learned. I’ll put it in a book report summary form to match with the topic of education.

The high cost of college in the United States is unique. It’s nearly twice per student of the average developed nation ($30,000). Two thirds of developed nations keep their college costs at $2400 a year or less, with many free.

There are few reasons why colleges are so expensive. I covered a couple of them 3 years ago. One of the reasons colleges got expenses is because they’ve spent a lot of money in luxury amenities such as lazy rivers, steakhouses, and ski resorts to lure students. However, the bigger reason is that student debt is the problem.

At the time, my thinking was:

“Access to money has gotten too easy for colleges. It seems to be a never-ending cycle. Raise tuition to build awesome stuff to recruit students. Students get bigger loans to cover tuition. Student debt grows and grows. It seems like the housing bubble to me.”

As one would expect, The Atlantic goes quite a bit deeper in their reporting.

For example, we learn that students in America spend around $3300 on things like housing, meals, health care, etc. In many other countries, students go to school closer to home and need fewer dorms and on-campus meals. The health care is covered differently. You could view some of this stuff as just showing up in a different line-item because there’s an inherent cost to feeding and housing students whether it is at home or at college.

In other words, it isn’t necessarily those lazy rivers that I suspected. I’m sure it doesn’t help, but we have to do dig deeper.

The Atlantic proposes one answer: It’s the cost of paying people’s salaries itself.

The argument (from a couple of cited researchers) is “… college is a service delivered mostly by workers with college degrees — whose salaries have risen more dramatically than those of low-skilled service workers over the past several decades.” The researchers argue that it isn’t much different than “doctors, dentists, and lawyers” who have risen at the same rate since 1950s.

The Atlantic agrees that this may be part of it. However, it makes a note that other countries have similar economic trends, so it doesn’t explain why American colleges are still twice as much.

Next, The Atlantic looks at the public university system where a large majority of students get their education. Funding for these schools have dropped off a cliff (my words) leaving them to try to recruit wealthier students with “nonteaching staff”:

“Some of these people are librarians or career or mental-health counselors who directly benefit students, but many others do tangential jobs that may have more to do with attracting students than with learning. Many U.S. colleges employ armies of fund-raisers, athletic staff, lawyers, admissions and financial-aid officers, diversity-and-inclusion managers, building-operations and maintenance staff, security personnel, transportation workers, and food-service workers.”

The Atlantic also points a finger at the college rankings. Published research ranks highly in the rankings and published professors are expensive. That doesn’t necessarily help the students. Student-to-teacher ratio in the US is slightly smaller. This may seem like it would the students, but there’s conflicting reports on that.

There is also a case to be made that the “net” cost of college, after grants, isn’t that far off from other countries. Costs may start out of higher, but come down quite a bit when you look at the final price.

This leads to a predictable problem that I’ve been struggling with (fortunately, I have a decade to figure it out). The “the price varies wildly depending on the place and the person.” It’s one of the reasons why college planning is impossible. While you might be able to figure out the cheapest (or the most expensive) college, it’s really hard to know what is going to be the best value so far in advance.

The Atlantic analysis takes a turn and compares college expenses to health care. In each case, America is terribly inefficient by paying twice as much for less than stellar results:

“Hospitals and colleges charge different prices to different people, rendering both systems bewilderingly complex, Staiger notes. It is very hard for regular people to make informed decisions about either, and yet few decisions could be more important.”

Finally, the Atlantic seems to get to the reason why I thought colleges were expensive all along:

“Ultimately, college is expensive in the U.S. for the same reason MRIs are expensive: There is no central mechanism to control price increases… In places like the United Kingdom, the government limits how much universities can extract by capping tuition. The same is true when it comes to health care in most developed countries, where a centralized government authority contains the prices. The U.S. federal government has historically been unwilling to perform this role. So Americans pay more for pharmaceuticals—and for college classes.”

The article then asks the question if Americans are getting more value from their colleges. That would obviously help justify the cost. Unfortunately, it seems like the end result of the education is not anything special in standardized testing. Graduates are getting more value in terms of earning more money:

“It’s a diabolical cycle: Colleges are very expensive to run, partly because of the high salaries earned by their skilled workers. But those higher salaries make college degrees extremely valuable, which means Americans will pay a lot to get them. And so colleges can charge more.”

The final conclusion uses a few words to sum up just how difficult college pricing is:

“This convoluted, complicated, inconsistent system continues to exist, and continues to be so expensive because college in America is still worth the price. At certain colleges, for certain people. Especially if they finish. But it doesn’t have to be this way, and almost everywhere else, it isn’t.”

Sometimes it feels like it is enough to make my head explode. I want my children to have every opportunity to succeed, which seems like it’s necessary to engage in this game of Plinko. I just wish it made a little more sense.

My Great 529 Plan Motivation Experiment

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Happy 529 Day! Today, 5/29, is often cited as a day to look into and donate to 529 college saving plans. (Are we all too Foolish to associate 4/01 with 401K plans?)

I’ll get to all the exciting stuff in 529 Plans in a minute, but first I’d like to reflect on Memorial Day weekend. There’s a lot going on in our country (assuming you are reading this in the US) and it’s helpful to pause and reflect on the good things and those who fought for those good things.

It’s because of those brave people that I can experience stupid, insignificant problems like spending hours at IKEA to find that they were out of stock of everything I wanted. It seems like a big deal at the time.

Now let’s get back to the wonderfulness of 529 plans.

Eleven years ago, I was looking for some way that I could help get my newborn nephew started on the right financial foot. I didn’t have a ton of money, but I had time. Given that he didn’t have object permanence yet, I had years. If I had the chance, I might have opened up a retirement account for him. However, it seems that I’m the only one crazy enough to think of tax breaks on such things.

I went for the next best thing, saving money for education. With 18 years, I figured that whatever I contribute will likely be 4x for him. Mathematically, that is roughly assuming 8% return and using the Rule of 72 to double once by around age 9 and again at age 18 (72 / 8% = 9 years.)

Until I started have kids of my own, I put a few dollars in there for birthdays and Christmas. Now, 11 years later, it’s grown fairly nicely. A lot of that is due to the great run of the bull market. It might end up being enough to cover 1/3rd of a year of tuition by the time he gets to college.

It should make a very noticeable difference for him, but I barely even noticed the money was gone. I feel there are very few “no-brainer” decisions in the world, but this is one of them.

Last month, I came across a regular reader and commenter, Stephanie from Graduated Learning, and her Tweet:

I should have probably sent my guide on How to choose a 529 Plan, but I figured that’s actually the easy part. I just gave it a Google search and there are several high quality sources there.

Instead, I shared something extremely interesting that my state, Rhode Island, does. It gives you $100 grant if you sign up when your baby is born. It’s the opposite of the old Monopoly Community Chest card where you pay the $100 for a baby.

However, since Stephanie doesn’t live in Rhode Island, I figured I’d use the same motivation:

To my surprise a couple other long-time personal finance bloggers, Poorer Than You and My Journey to Millions saw this and decided to jump in:

The plan worked! Baby Stephanie has a 529 Plan.

With my 4x rule above, we can expect the $75 to grow to around $300, which isn’t even a drop in the grand scheme of college savings. However, Stephanie is going to start monthly contributions. Baby Stephanie should be the beneficiary of years of compound interest.

I’ll be the first to admit that I loved how this worked out. I often need a kick in the pants to do what seems like a small, insignificant thing. Now, I just have to figure out how to draw on this experience to motivate myself.

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