A few years back, I wrote a short guide to 529 Plans as I put some money away for my niece and newphew’s college savings. The plan I chose was Ohio’s CollegeAdvantage, because California didn’t offer any state tax breaks and the investing fees with CollegeAdvantage’s Vanguard funds were microscoptic. I’m a little behind on reading the newsletters, but I noticed an interesting thing in the Q4 edition of their 2013 newsletter (click that link to open it up in a new window, so you can follow along).
It lays out two facts that I found interesting. The average savings goal for parents is $38,953 for one child, yet the average savings balance is “only” $18,013. This sounds like a big problem doesn’t it? In some ways yes and in other ways no. Sometimes the numbers are tricky.
First, the average savings balance is going to include many people who just started to fund their accounts. It’s not the average account for 16 year olds. If you look at the average age of the children in the accounts, it would seem to be 9 years old (the 1 year olds offsetting the 16 year olds)… which means that people are almost on track for their goals with $18,013. In fact, I’d bet the average age is closer to 6. 529 plans have only been around for 18 years (started in 1996) and I’m betting that they are more popular today than they were then. So maybe we are more on track with our savings than we think.
Additionally, the average savings account balance includes people like me. Sure, I’m probably the rare uncle who opens up 529 plans, but these accounts are intended to be supplemental to their parents’ own savings. I certainly don’t have the goal to save nearly $39,000 for each of them. I even opened up an account in my own name to squirrel away a little money for a future son (and now I have two). However, since I’ve moved to a state that offers a tax benefit, I’ve opened up another 529 plan… and I’ll be opening yet another when my new son’s paperwork comes through (Social Security number, birth certificate etc.). I’ll have 5 different 529 plans all nowhere close to $39,000… but it is by design.
The other point this short chart makes is that the $39,000 amount is only likely to last through 2 years at a public university. One could make a case that the goal is set too low to begin with. On the other hand, there’s no rule that says that parents have to put up 100% of their children’s college education. In fact, I think the children might get more out of college if they have some “skin in the game” by paying for a share themselves. However, this is a whole other discussion where I don’t think there are any right or wrong answers, just people’s personal preferences.
My goal with highlighting this information is the importance of thinking critically. Sometimes you are presented with information that may seem alarming, when it really isn’t.
When I first learned I was pregnant with out son, I started saving for his college. There were no college saving plans like 529 available back then so everything I did was strictly on my own. A couple of key items….1. Consistency. I saved something every single month. Sometimes during a lean month it was only $25 but eventually as our finances improved I got that amount up to $750. 2) Be aware of tax treatments for the saving options you choose. The child’s tax rate vs. your tax rate can make a big difference. 3. Get the child to help. For his part, our son worked summers in high school and college. That money was his spending and car money. He also helped reduce the amount of tuition we incurred by taking (and passing) advance placement exams which in his case took three classes off his schedule at college. He also took a couple of classes at the community college. Tuition is cheaper during summer school than during regular semesters. And finally, he went to our state’s flagship public university which is nationally ranked in the engineering program he took. Much less expense there than going to a private or out of state school which really increases the tuition and fees. The end result was a bachelor’s degree in 4 years and a master’s two years later with zero student loan debt. We managed it because it was one of our financial priorities.