College Tuition Estimate
Hello $wanigans! Welcome back to The Green Swan. One of my annual personal finance to-do projects is to evaluate my 529 accounts and my college tuition estimate. I’ve started this annual project shortly after my little one’s birth, just over two years ago. My second review of the estimates was completed in April 2015 around the time of his first birthday and I am overdue for my next re-assessment. I blame the blog…it has been a pretty huge time commitment for me in recent months! But with the urge from Kalie at Pretend to Be Poor who left a comment on a previous post regarding how I prepare my college tuition estimate, I have recently completed my annual review and am ready to share my version 3.0 of my College Tuition Estimate! Thanks for the push to get it done, Kalie!
First, let me explain my process. As previously mentioned, my wife and I have a two year old and we wanted to start early with funding his college education to maximize its tax benefits. In order to understand how much I would need to contribute over time, however, I needed to have a decent estimate of what college tuition would cost in 2032.
As many of us are all too familiar with, college costs continue to go up and up and up. In the last decade plus, it has been staggering the increase in tuition with some years seeing nearly double-digit percentage increases.
The chart below provided by The College Board outlines the tuition costs in 2015 dollars going back to 1975. This chart shows how the increases in tuition have consistently outpaced inflation by a wide margin!
Tuition cost increases have outpaced inflation for the last 40 years! That makes the prospect of tuition costs in 2032 to be quite scary! Will the cost increases keep up at the same pace they have been historically? Some would say no, it is inconceivable for that to be the case because then basically nobody could afford it (you could argue that point today even!). But if it has been that way the last 40 years, who is to say it won’t continue for the next 18…
If historical price increases aren’t a good predictor of future price increases though, then how much will tuition increase in the future? For that question, I turned to the online community to find out what other folks were estimating college costs to be, and compiled a number of estimates to formulate my opinion.
2014 College Tuition Cost Estimate
As outlined in the chart below, in 2014, I compiled estimates from Saving For College, FinAid, and T Rowe Price as well as my own discretionary estimates based on the 2013 in-state cost of tuition at University or North Carolina per the US Department of Education with 5% and 7% inflation estimates. Not that I expect to be living in North Carolina still in 2032 (maybe, but maybe not…) nor do I know if the little one will prefer UNC or NC State or any other in-state schools. I simply just picked it in order to come up with a ballpark figure.
With that background, you can see the estimates come in all over the board. Saving For College expected a 5% inflation, FinAid a 7% factor, and T Rowe Price a 6% factor. Based on my UNC estimates, you can see how much of a difference the inflation factor plays in the estimate given how far apart those two figures are (almost $100K difference!).
My initial conclusion was to expect public college to cost near $250K, or at least that’s what I narrowed in on.
2015 College Tuition Cost Estimate
In April 2015 I ran the estimates again, this time solely relying on Saving For College. I took this simpler approach since I was solely looking to confirm the 2014 numbers were still in the right ballpark. The addition I made in 2015 though was cost estimates for private universities as well as public (who knows, maybe the little guy will get accepted to Harvard…Yikes!).
My conclusion in 2015 didn’t change much for the cost of public universities. While the ranges dropped because of lower inflation estimates, I don’t mind conservatively estimating approximately $200K – $250K still. For private schools, it is probably safe to estimate $350K or more.
2016 College Tuition Cost Estimate
In July 2016 I again ran the estimates, but I grabbed them from a few more sources to have a more complete view. I also ran both private and public universities again this year.
Saving For College continues to use slightly lower inflation estimates than the other sources. Using the more conservative estimate with 6% inflation, T Rowe Price and American Funds continue to validate my range of $200K – $250K. The private university costs are pretty astronomical, ranging from $350K – $500K.
How Much We Plan to Pay
Every parent needs to determine how much they are willing and able to pay for their children’s college tuition. Our baseline was what our own parents paid for our tuition. My wife was fortunate that her parents wanted to pay for her entire 4-year degree and that was very generous. This certainly allowed her to focus on her schooling and any part time work was more discretionary. My parents were very generous as well, helping pay for half of my tuition and other college expenses. The part time and summer jobs I held helped pay for the remainder and having my own “skin in the game” helped motivate me to do my best.
With that background, we have begun to formulate our own opinions of what we want to do for our children. And while there are many questions up in the air with college (in-state, out of state, public, private, inflation factor, etc.), our end goal is to have enough saved in each 529 account for roughly 100% of a 4-year public school (or the equivalent of 50% or more of a 4-year private school).
Whether it is all used for the desired purpose or not is to be determined, but the good news is 529 plans offer a lot of flexibility. This helps us plan for a use of the money with contingency plans. This includes:
- 529 investments can be withdrawn penalty free for more than just tuition, including room & board, books and supplies, computers and related equipment, as well as qualified special services
- We could change the beneficiary of the account to another child, and potentially grandchildren as a inheritance strategy and a way to utilize excess funds
- If children receive scholarships, withdrawals are allowed penalty free; however, tax on earnings would be required (in effect making the 529 plan act similarly to a normal taxable brokerage account)
- Also noteworthy, if the children elect to go to a U.S. service academy for further education, from a tax and withdrawal standpoint it is treated like a scholarship
- We could always elect to incur the 10% withdrawal penalty for non-qualified withdrawals as a last resort
Timeline for Contributions
While we have no idea whether he or other future children will ultimately decide to go to college at all, a 2-year program, a 4-year program, an Ivy League school or a service academy, we want to be prepared to help out.
Beginning in 2014, the little one’s birth year, the state of North Carolina passed new tax legislation that took away the favorable state tax deduction of 529 contributions. So given there was no motivation to space out contributions to maximize the tax deductions, we figured the sooner we contribute and get the money working the better because it would have longer to compound on a tax free basis.
With that as our guideline, we targeted a contribution of one year’s worth of school in each of his first four years. Just like all our other investments, we intend to Invest to Win and won’t taper back much of the investments to more conservative assets until college is a few years away if at all. Assuming an average 8% annual return on investment, and 18 years until college starts it was a simple math equation as to how much we’d ultimately need to invest.
Our conclusion was approximately $70K – $80K in total contributions in our children’s first four years. We may ultimately choose $70K and preserve optionality on the remaining portion to see how the investments are performing as years go by as well as how the college tuition estimate evolves over time.
I wanted to go back into this post and add in some of my favorite recommendations. Half of the battle of responsibly paying for college is to know the ins and outs of the process. If you are looking for help with figuring out how 529 plans work, and what your best options are, check this post by Clark. If you need help understanding the financial aid process in general, check this post by the Department of Education. If you want to learn more about student loans – including the differences between federal and private student loans, what your best options for private student loans are (if you have to take them out), and how repayment works – then check out this post by The Student Loan Report. If you are looking for alternatives to student loans, check out this post.
There is no doubt college for our children will be expensive. I think the lesson is to take advantage of the tax benefits of 529 plans and to start early to allow the contributions to compound. While college may cost $250K in 18 years, by starting early and letting approximately $70K compound over time can make it an easier pill to swallow.
How do you all plan to save for your children’s college? How have you estimated the college tuition cost? How much do you plan on paying for? Does your state offer special tax benefits that mine doesn’t? Let me know in the comments below.
Thanks for taking a look!
The Green Swan
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