Lazy Man and Money

Ask the Readers: Retirement Fund Or College Fund?

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free collegeToday I’m looking for your opinions on one question. Please leave a comment with your thoughts.

David Spigarelli, The 529 Guy sent me a copy of his book: The 529 Handbook (affiliate link). Unfortunately, I’ve been so busy that I’m just a few pages in. I’m not new to 529 Plans having written choosing a 529 plan and 29 thoughts on 529 plans. I didn’t expect to learn too much, but I was wrong. I forgot that books often give you a deep analysis.

When looking at planning to pay for college, I concluded, college planning is impossible, but suggested that you do it anyway. You’ll never know what the costs are going to be. My 8-year-old is tracking to be an architect someday, and Rhode Island School of Design’s official estimated cost per year is $78,941. People rarely pay the sticker price, but it would be $320,000 for four years. Maybe he gets a free scholarship. Perhaps he goes somewhere else and gets a partial scholarship. There are endless options that make the cost appear somewhere between $0 and $320,000 a year.

Spigarelli’s book has some great advice on tackling this seemingly impossible puzzle. The idea is to break it down into pieces. So at 8-year-old, we’ve got about ten years to save. I will assume that our invested money grows 3% more than inflation. It may not seem like a great assumption with inflation right now, but we can’t use 2022’s 8% inflation and 25% drop in the market as the norm for every year. Instead, we’ll go with investments growing by 6% and inflation at 3%.

With that 3% growth, I can put “1.03 y-to-the-x-power 10” in my calculator. I now know that my money will grow by 34% or about one-third. To pay for $79,000 costs, we’ll need $59,000 invested for each year. That’s $236,000 in total. To come up with a monthly payment, I need to divide that by ten years and then by 12 months. The result is a mortgage-like $2,000/mo. Ouch! Since we have two kids, that’s $4,000/mo.

That exercise was a rough estimate. The money invested at the end of the ten years won’t have time to grow by 34%. We won’t choose to go to RISD if it’s the sticker price. We’ve got a number of other ways to plan our specific case of college expenses which include my wife’s GI bill. We also expect years of private school to give us more scholarship options. The GI bill alone should cut our total college bill in half. (It gets complicated, and it will do less if they both go to private schools, but this is the estimate we’ll go with.)

Let’s assume that we should instead save $2,000/mo. for college expenses. Awesome! We can get started on that, right?

Nope. We’ve got a problem.

Personal finance experts rarely universally agree on anything, but they seem to agree on one thing: You should always fund your retirement before a college fund. The reasoning is simple: You can’t take loans for your retirement. It makes sense, and I can’t disagree with it.

However, with that logic, very few people would ever fund a college fund. Retirement planning is a lot like planning for college costs. You can make some guesses, but life changes a lot. It’s possible to come up with a number and to even be on target with that number, but the percentage of people who do it is likely very low. I would guess it to be under 25%. To complicate matters further, college funds are typically used before retirement funds. I’m 46, and many people I went to high school with have kids in college. I can’t imagine many of them have fully funded their retirements.

Let’s take it even one step further. Those parents had their kids around age 28. (That’s a perfectly reasonable age to have kids, we were later, obviously.) It’s nearly impossible for a 28-year-old to reasonably save for retirement and college.

Finally, my question for the readers is, “If you are supposed to save for your retirement first, how do you ever get to saving for kids’ college?” I’m sure the easy answer is that you have to do both at the same time. However, if that’s the case, how do you divide the money between the two? Do you put 75% in retirement and 25% in college? Do you put 60% in college and 40% in retirement?

529 Plans: 29 Thoughts for 5/29

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Happy 5/29 Day! Regular readers probably already know that a 529 is a college savings plan. New readers who didn’t know that, just learned something.

529 PlanI first started looking into college savings plans in 2007, when my nephew was born. I wanted to give him a little head start. I loved 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 more than $6,000. More than half of that is 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. We have my wife’s GI Bill. We’re investing in their education with the best private school in the area, so they better earn scholarships too, right? Finally, we want the kids to have some of their own money for their own education so they don’t skip classes.

In short, there are a lot of ways to save for college. Today we’re focused on 529 plans. Let’s get into 29 thoughts on 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 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 the 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 to 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 of these down the rabbit and what your experience with 529 plans is.

529 Plans: How Do you Choose?

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[I know this is Memorial Day. We should be focused on the people who made the ultimate sacrifice for our freedoms. There are a lot of great news stories that cover the significance in great detail… far better than I ever could.

Instead, I cover personal finance and while many people were at BBQs this weekend, we had 529 Day on May 29th. I republished an article then, but it was a Saturday on a holiday weekend. Since I have this other 529 article, I think it makes sense to republish this as well. Between the two weekend holidays, maybe it counts as one regular week day.

I originally wrote this article in 2007 after days of reading about to best gift money for my nephew’s college. Fourteen years later, the specifics of the plans may have changed, but the overall lessons and logic remain the same. My nephew and niece (who came later) have $5,000 each in college savings in the plan. I’m keeping this original 2007 form even though a lot has changed since then.]

I mentioned yesterday that I’m looking to give my newborn nephew a head start in his education savings. Having gone through a number of options, I decided that a 529 Plan was my best option. Unfortunately, a lot of research may be necessary to decide on the right state’s 529 Plan for you. Here are the steps I took to determine which state will receive my money. Remember that I’m looking to give $500 initially and $100 a year after that.

Check your own state first
My home state is California. I thought it would be very easy to see if there was a tax benefit for my state. However, states don’t often advertise that your invest is NOT tax-deductible. They are in the business of getting you to invest with them, so it doesn’t serve their cause to advertise a fact that could be construed as a negative. When the originating source isn’t helpful, I suggest looking for a third party. Kiplinger.com came to the rescue with a list of states that offer a 529 Plan tax deduction. It’s not the most recent list, but the best I could find. If your state is on that list, chances are your best option is to invest in your own state’s 529 Plan and take the tax deduction. The exception is if your own state has a significant reason to reject them, such as the ones below. If your state, like mine, isn’t on that list, there’s no particular advantage that I could find for going with that state. In fact, you may be better off looking at another state’s for a variety of reasons that we will cover now.

How is a state’s 529 Plan sold?
There are two basic ways to invest in a 529 Plan. The plans are sold directly or through an advisor. Some states may offer either one or both options. The direct sales is the do-it-yourself method and the advisor option is for people that wish to have a little more guidance. If you’ve been reading my writing for any length of time, you know that I’m a direct kind of guy. I hate paying fees when I can do the research myself, so I eliminated any plans that didn’t have a direct sales option.

How do I know if a state’s plan is any good?
Put simply, this is the biggest question for those that are looking outside their own state. With 50 states and some having multiple plans, you could spend a week reading about each of them. I typically find this stuff fun, but it has it’s limits. I spent a lot of time researching various articles that listed 4 or 5 good states, but none of them gave me anything to compare or went into detail on why they are good. I finally stumbled upon Saving for College’s 5 Cap Rating System. With their list you can pretty quickly scan through and weed out quite a few sub-par states. In my research, I only looked at plans that had 4.5 Caps for the out-of-state and had a direct sale option. This left me with just a handful to consider. I still needed to narrow it down which required me to reject some plans.

Reasons to Reject a state’s plan:

  • Minimum Investment
    Since I intend to invest only $500, any plans that required more than that had to be excluded. I came across a few that were $1000 to start and some that seemed to require automatic deposits of $25 a month. After eliminating those I was left with about 4 or 5 different options.
  • Maintenance Fees
    Some states charge $25 a year if you don’t have $25,000 in assets with them. We are expecting to contribute $100 a year in addition to our initial deposit. Those maintenance fees would be 25% of each year’s investment. This eliminated Utah for me despite the fact that it’s one of the best state plans according to most reviews.
  • Expenses
    Like mutual funds, 529 Plans have expenses. Like you and me, the financial folks have to make their living. There are numerous reports on how index funds often outperform the managed funds, so I prefer to go with them. They typically have very low expenses since they aren’t out visiting companies to research their investments. So I looked at the expenses of the remaining choices. I was happy to stumble upon two states with expenses as low as 0.30% that matched all the above criteria.
  • Investment Options
    I might be getting a little picky here as most plans offer the basics – age-based plans, equity plans, balanced plans, etc… However, a few plans go above and beyond and offer more choice. Other plans offer fund families you might already know and trust.

The Winner
Ohio passed all the tests with flying colors. I don’t have the beneficiaries social security number, so I haven’t signed up yet. Maybe during the final review there will be some kind of gotcha, but right now all systems are go. They seem to have put together a best of breed program. There are no fees, no significant minimums (just $15 per investment option). Their expenses are amongst the lowest I found (except for you lucky folks who live in Louisiana) as long as you go with their Vanguard option. I’ve read that you can mix and match a few different Vanguard funds, which, if true, is going to be icing on the cake. If it’s not true, then I’ll go with the Aggressive Growth option as it’s 85% Vanguard Total Stock Market Index and 15% Vanguard Institutional Developed Markets Index Fund. I love the way that Vanguard has handled my ETF portfolio, so I’m excited to give them a little more money to work with.

The Runner-up
Michigan almost had it all – it really was a photo-finish. The only differences I could find were in the investment options. TIAA-CREF is a great organization, but I don’t know them like I do Vanguard. They also had only three static investment options and it didn’t seem like you could build a portfolio from them at all. Though their all equity option was tempting, I’m passing Michigan for more choice.

Have you invested out-of-state 529 Plan? If so, I’d love to read in the comments what factors influenced your decision.

Now Can We Talk About Free College?

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free college
I have been planning to write this article for over a year after this Twitter discussion. Well, I had hoped to write about it before then, but that discussion renewed my interest. The idea of “free college” seems to be very political – it shouldn’t be.

We don’t get political about free high school. There was a time when a high school degree was acceptable for many white-collar jobs. When I went to college in 1994 that was the new normal. I can’t think of one kid in my class that didn’t go to college – but being in the higher academic classes, this is just my subjective view. I was fortunate and got a full scholarship, but my family had saved up for a long time for college costs.

Tuition wasn’t so bad in those days. It’s really become a big problem in the decade or two. This 5-minute video explains what’s wrong, but in general, loans became too easy, which meant that colleges could simply keep raising prices.



It’s a good time to bring this topic back. Harvard recently announced that all classes for the 2020/2021 year will be online. There will be no in-class instruction. Tuition however will still be around $50,000 a year. Harvard also has a $40 billion endowment. Harvard has had free online courses for years. I would hope that for all that extra money, the quality of education would be much, much better at the university. There would certainly be teacher interaction, which presumably is not available in the free courses. (Note: I haven’t taken any of the free courses.)

In my opinion, it seems strange that there’s such a price difference between the two. You’d almost have to work to make the online courses particular poor and of zero value.

I know comparing all schools to Harvard is silly, but many colleges are going to be online due to COVID-19. It’s not like they chose to. It’s simply the world we live in now.

Some students are rightfully pointing out that most school’s online tuition is a fraction of the cost for in-class tuition. For example, you can get a Master’s degree for $7,000 at Georgia Tech (and these cheap advanced degrees should be the future.) If classrooms are closed, what value do they get for the rest of their money?

How Could Free College Work

Many people object to the idea of free college because they presume they’ll have to foot the bill in the form of increased taxes. Yes, that would have to happen just like how taxes fund our public schools now.

Option 1: Free Online College

What if the version of free college isn’t what we viewed as the traditional college experience. What if there was a national curriculum of free courses just like the ones Harvard already offers. There are a lot of these classes already out there. MIT is another university that has free courses. To create a complete national curriculum, you’d have to fill in some gaps and maybe recreate the content (or license it) for legal reasons.

For lack of a better name let’s call this the National Online College. We should be able to find some marketing folk who can make it sound more exciting. (I’m obviously not one of those people.)

Creating many of these classes is a one-time cost. While some subjects like artificial intelligence will change over time, calculus is calculus. Spanish and Spanish literature doesn’t change much. Since there are already online learning resources of foreign languages with resources like Duolingo.

Additionally, there should be placement exams where students could earn credit for any previous study or knowledge. The goal here would provide students with a short path to a degree and not make them have to do years of busy work for the sake of earning the degree. Designing these exams would also be a one-time expense, though there would be some minimal annual maintenance.

I know, I know. Online learning is terrible. I just completed months of teaching my 6 and 7-year-olds through their tablets. Online learning is particularly bad for young kids. I think college students are able to handle it better. If college students knew it will get them a job that pays more money, that will provide a lot of motivation. My young kids can’t make the connection of education to financial stability to an easier life.

My National Online College idea would obviously not be the ideal college. It’s impossible to be ideal and online. However, it would be designed to be the lowest cost option – so low that it can be funded with minimal increase in taxes. That means that it shouldn’t be political and get strong support from the government.

The big question most have is, “Would this National Online College degree be worth anything? Can I get a good job with it?” That would be up to employers. It should be worth something if it’s designed well and if the exams are trusted indicators of proficiency. This might also be an area we could use marketing to overcome initial resistance. In the past there’s been a stigma against people who didn’t go to traditional colleges – this could be instead be marketed as students who are wise enough to avoid mountains of debt.

Currently, employers use a university’s name and reputation for validation of the job candidate. That can work for getting qualified people, but it feels more and more like the elite school’s value comes at the cost of years of debt. The National Online College would provide another alternative, even if it wasn’t the best learning environment, would help level the field.

Option 2: Free Community College

The taxpayers who say, “We don’t want to foot the bill for free college” aren’t going like this one. However, it’s already partially in place in a few states. For example, my home in Rhode Island has a free college plan. It isn’t open for all income levels, and it is a community college for an associate’s degree.

It’s a start and the governor is looking to expand it. This would improve on the National Online College idea above providing live instruction (assuming we return to pre-COVID-19 conditions). The community college experience would be better than National Online College one and they could work together. For example, after going to community college, you would likely be in a better position to score better on the National Online College’s proficiency exams.

Option 3: Free College, Cancel Debt

This is the option that you hear from Bernie Sanders. I’m for it with some restrictions – such as colleges not building lazy rivers. (There’s some discussion that the amenities don’t raise the price of colleges much – but this spending simply isn’t compatible with the idea of free college.)

However, I realize that this is a tough sell for many taxpayers. I think we could do it with Elizabeth Warren’s wealth tax. Those ideas seem too progressive at this time.

The other reason why I don’t like this option as much is that it keeps colleges in a ranking system. It would be great if society could get to a place where a person passing the National Online College test gets the same opportunity in the workplace as someone who went to Princeton.

Final Thoughts

I’m not an expert on education. I don’t even pretend to play one in the government like Betsy DeVos. (Note: She is wealthy through ownership MLM/pyramid scam Amway.) There are many people with more experience in this area than I am.

However, I do have a few advantages over many of those people. I can simply anonymously blog about ideas freely without any political repercussions. I also don’t have to do any of the work in changing the system. Lastly, I’m sure things get very complex at the low level of implementing such a plan. Finally, at 1300 words, there’s no expectation that this is a complete solution.

One Solution to Planning College Expenses?

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Nearly three years ago, I wrote, College Planning is Impossible (But Do It Anyway!). At the time My kids were just 2 and 3. The idea behind the article is that college costs vary so much, that there’s no easy way to plan for them.

If you want to be aggressive you could save a ton of money in a 529 Plan. That’s assuming you have a ton of money… which most people don’t. The downside to that (other than the lack of a ton of money) is that if you put too much in, you have to deal with penalties or other creative uses for 529 plans. Perhaps the best thing to do is just let the kids have the remainder for their kids… or maybe some schooling down the line.

Essentially, if you overshoot the 529 savings, your money is trapped. That’s not a terrible problem to have, but it’s less than optimal. You may even think that you are planning it well, but what if Jack/Jane gets a scholarship/grant or goes to a public school making the costs very different than what you planned?

College has just too many variables and you can’t plan for them…

… except we did. And I swear it was completely by accident.

Before I get to that I’d like to cover some ways to cover college expenses. Not all will be applicable to all families or students. There’s a lot of tools in the tool box and we hope utilize them all.

Covering College Costs

I focused on 529 plans above, because that’s the traditional savings vehicle for 529 plans. Sorry Mr. Coverdell… I have you, but you are mostly obsolete. Like Smelly Cat, it is not your fault. One of the reasons I got a Coverdell was that it could cover private school costs before college, but 529 Plans can do that now, thanks to the recent changes in the tax law.

How could one cover college expenses? Here are a few ideas:

  • 529 Plans – That’s obvious one. It’s a great vehicle to saving money
  • Schoralships/Grants – It would be nice to get these. Some schools may give more than others, so our plan is probably to apply to a lot of schools?
  • Pay off adminssions – Just making sure you are paying attention. This certainly wouldn’t save you money. You might end up in the news… and not in a good way.
  • Student Loans – The old standby. It’s a big problem nowadays, so hopefully we can keep this down.
  • GI Bill – My wife’s military service gives benefits that we can split between the kids. I realize that not many people may have this option.
  • AP credit – If you can test out of a few classes, you can get some credit without having to pay for it.
  • Community College – Most community colleges are cheaper than traditional public and private universities. It may be possible to take some basic pre-requisits for cheaply and then transfer.

I feel that it is like having multiple income streams. The hope is that through some combination of the above (with minimal loans) paying for college won’t be impossible.

But we have one secret weapon that’s not listed above. We have rental properties. The mortgages will be paid off around the time the kids start college.

This means that we’ll likely have some $35,000 or so (after expenses) each year. Is it enough to cover college costs in 11-12 years? Who knows, but it will certainly help. The benefit of this accidental plan is that we don’t have to think about whether we are saving enough or too much in a 529 plan. If there’s extra money left over, that’s just living expenses.

So how might you be able to plan this more intentionally? Unfortunately, you’d need have the money for a good downpayment around when the children are born. Then with a 15-year mortgage, the timing should be right. Of course, it’s not great being a landlord while raising newborns. OF course if you have the money for a downpayment, you put it in a 529 plan and mabye expect it to quadruple (assuming 8% annual returns) by the time the child is in college. I think prefer the real estate plan, because it is more flexible.

I’m not saying you can do it too. Like my 6 year old’s new catchphrase, “Nope, not at all.” However, it is something that you may want to explore.