Let’s Talk About 529s 5


My previous posts about 529s were Finance Fridays posts which can be found here:

What is a 529?

Choosing a 529

Wait… but today is Whatever Wednesdays… Why are we talking about 529s?

Well, you see a colleague and I mine were talking about them yesterday, and I felt it was good discussion. It also helped me to understand how people may view 529s.

While its benefits seems “obvious” to me, it is less obvious to others. 

First, some background. This colleague of mine is a physician and his wife is also a physician. He has two little girls. In that sense, our needs/priorities are very similar.

He lives in a nicer area/house than me and plans to send both of his children to private school day 1. However, he also has little, if any, student loans. So this area might be a wash since I am the opposite, planning to go the public school route while having a soul-crushing amount of student loans.

So I casually brought up the topic of 529s:

“Are you contributing to 529s for your kids?”

“We made the accounts, but we haven’t been making monthly contributions.”


So now, the question was, why not?

My colleague went on to say that he felt paying down the principal on his mortgage was a better use of any excess money he had. I can’t argue with this. It’s a very conservative plan. If you assume the interest rate on his mortgage is reasonable, let’s say 4%, then that’s a free 4% interest if he pays down the principal sooner. Compound interest works both ways right?

However, if you believe in the power of index funds, getting a 7% return on your 529 over an 18 year period isn’t unreasonable. Is it more risky? Yes. It’s not a guaranteed 7%, or even a guaranteed 4%. Basically, it’s not guaranteed at all. But, if your risk tolerance allows for it and you think you can get a reasonable return AND you were planning to help pay for some college anyways, then I think a 529 is still a good option.


How much of college to pay for is very person dependent.

My parents paid for my college. I went to a state school so it wasn’t soul-crushing debt like my medical school loans. However, it was something I didn’t worry about while I was in college. For that, I thank my parents. They also managed to pay for my older sister and little brother as well. My wife’s parents also paid for her college as well as her two brothers. So, my wife and I think it is very important for our kids to have college mostly paid for. Now, for graduate school or medical school or whatever, I think it is important that they take care of that on their own, like my wife and I both did.

If you read the other 529 posts, you’ll see that college tuition is continuing to increase in price. Unless something changes in the next two decades to stop this rise, you can expect to pay 40-50k a year in tuition for a public school. As I detailed in those posts, my (eventual) plan is to put away $500 a month for each of my kids. While this won’t cover all of their needs for college (especially if its a private school), it should cover a majority of it.

Now, $500 a month is a lot of money, but I feel it is important. You either pay now, or you pay later. I am committed to paying for college for my kids, so that is why a 529 is a priority of me.

For some of you, maybe you don’t plan to pay for college for your children. That’s ok. However, since I have been on this side of soul-crushing debt, I just can’t imagine placing my children into $200k-300k of debt from college alone. If you combine this with the possibility of medical school, how much debt will these kids graduating from medical school in 2035 be carrying when they start residency…?

500k? 600k? 800k? A million? Before they even can start paying it back?

Now, I am not a rich man by any means, but for the reason above, I have prioritized the 529s of my kids pretty significantly.


Wait, what if they get scholarships?

Great! Then they can use less of the money in the 529. If there is any money left over after schooling, they can roll that money over to help their siblings, or their children.


So back to my colleague…

I told him of my “crazy plan” to try to put away $500 a month for each of my kids. That’s a lot of money, where was I going to find that much money?

Most of it will come from moving the kids from daycare into public school. However, it doesn’t have to be $500. I said, hey dude, just start with $100 for each kid. Just do one or two less family dinners out a month. Honestly, you probably won’t notice it. He said, yea that’s probably true, but will that make a difference? So I showed him the calculation:

“Let’s be simple instead. Junior is born, you make a 529, you put $100 in it a month for him, direct deposit from your bank every month and never touch it again.

$1 principal, $100 a month, 18 years to grow, 7% interest is…. $40,802.22 — that’s enough to cover one year tuition and you probably won’t feel it (as an attending).”

$100/month buys you a year of tuition. 

The truth is, I think he also wants to pay for college for his kids as well. Unfortunately, I think he is putting off that idea until they get into college.

“We’ll find the money when we get there.” is likely his mindset.

That’s understandable. You have other priorities, and I understand that.  However, having 1 or 2 years tuition ready to go will prevent a lot of stress later on.


So what did he decide to do?

After we talked a bit and crunched some numbers, he thought about it, and his new plan is to work up to putting away $250 a month for each of his kids ($500 a month total). That should buy them 2 years of tuition each. I think this was on purpose since his kids are 2 years apart.

ie. One would start college and have two years paid for upfront. Then 2 years later his second will start and have 2 years paid upfront. This helps stagger the cost of college a little bit instead of being a a lump sum all at one time when the 2nd one starts and you have to pay for both at one time.

I think he will still pay for the majority, if not all of their college. However, having some of it paid for in advance will be very helpful.

If you make it a priority, you can usually find the money to fund it.


TL;DR

Talk about 529s. If you’re probably going to pay for college, then it’s a very good option.

It’s not necessarily about paying for all of college upfront.

$100/month buys you a year of tuition. 

If you make it a priority, you can usually find the money to fund it.

 

-Sensei

Are you planning to pay for college? Do you have a 529? Why or why not?

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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About Sensei

A young attending physician trying to navigate the mine field that is life after medical school…


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