Life has changed a lot for me and my family since we had a baby earlier this year. Besides the obvious day-to-day changes that have happened, adding a baby into our life has also meant a significant change to our overall future financial plans. Retirement and financial independence isn’t the only thing we have to think about anymore.
Probably the biggest thing that we’re going to have to budget into our overall savings strategy is the cost of college. It’s hard to even think about something so far out into the future when you’re so busy with simply figuring out how to live life with a baby, but make no mistake about it – college is something that has the potential to be so expensive that you have to start saving for it from the day your child is born.
That’s because the numbers you have to save in order to fully fund your child’s college education are astounding. Take a look at the following video from CNBC, which details exactly how much you’d have to save if you want to send your kid to an elite private university like Stanford 18 years from now.
https://www.youtube.com/watch?v=7ElmzDRIr5Y&t
The cost? In 2038, it’s estimated that a year at Stanford will cost a little over $133,000. Over the course of four years, you’re looking at paying over $550,000 in education costs. In order to reach that amount in 18 years, you’d need to save $1,765 per month or $21,183 per year!
Holy crap. Obviously, I don’t know what the future will hold, but my wife and I both went to in-state flagship state schools and we have the idea in our minds that we’d be willing to pay for either our in-state school or possibly pay for a really elite school (think a Harvard or Stanford type school). It’s very unlikely we’d be willing to pay for an out-of-state school or an expensive liberal arts type school.
Still, no matter what we do, college is something that we have to plan for now, rather than later. Fortunately, this is a topic that I’ve thought about, so I have some ideas about how we can cover this massive cost in the future. In today’s post, I want to go over some of the college savings strategies we plan to use.
College Savings Strategy #1: The 529 Plan
When it comes to college savings strategies, our first option is to take advantage of a 529 plan. As a quick primer, a 529 plan is a tax-advantaged account in which you invest post-tax money that can then be withdrawn tax-free so long as the contributions are used for qualified education expenses. It’s easiest to think of a 529 plan as similar to a Roth IRA, but for educational purposes only.
Here’s a diagram to help you visualize how a 529 plan works with respect to taxes:
529 plans are administered by each individual state, but it’s important to note that you’re not limited to opening a 529 plan in the state that you live in. Rather, you can open a 529 plan in any state that you want and use those funds to go to any college that you want. Because almost every state has its own 529 plan, things can get a little bit confusing since you have a lot of different choices when it comes to which plan you choose.
To keep things simple, you can use the following two-step process when deciding which 529 Plan you should use:
- If your home state offers a tax deduction for 529 plan contributions, use your home state’s 529 plan.
- If your home state does not offer a tax deduction for 529 plan contributions, then go with the New York 529 plan.
*Note that some states give you a tax deduction if you contribute to any state’s 529 plan, so in that situation, you can choose to contribute to whichever 529 plan you’d like.
The reason why I recommend using your home state’s 529 plan if your state offers a tax deduction is that, obviously, you get a tax deduction for something that you’re already going to be doing anyway (e.g. saving money for college). About half of the states offer some sort of tax deduction, so check your state to see if this is the case.
In the absence of a tax deduction (or if you’re in a state like my home state of Minnesota, which gives you a tax deduction if you contribute to any 529 plan), then I recommend the New York 529 plan. I think the New York 529 plan is the best one for two main reasons:
- They use Vanguard funds, which I think are the best funds to invest in; and
- They charge a 0.15% management fee, which is about as low as it gets in the world of 529 plans.
I currently have my son’s 529 plan fully invested in the New York 529 plan’s Aggressive Growth Portfolio, which invests 70% into a Vanguard Total Stock Market Index Fund and 30% into a Vanguard Total International Index Fund. You really can’t go wrong with this type of investment over a period of a decade or two.
In an ideal world, it’d make sense to front-load my son’s 529 plan, since that would give it the benefit of more time to grow. Remember that saving for college has a shorter time horizon compared to investing for retirement – generally, 18-22 years when it comes to saving for college vs. a lifetime when saving for retirement, so it’s important to get as much money as you can in there earlier, rather than later.
Unfortunately, my wife and I aren’t in a position to heavily invest in my son’s 529 right now given our many competing interests – saving for a house, paying for daycare, paying off student loans, etc. My guess is that most people with young children are in a similar position. It’s sort of the bummer when it comes to saving for college – at the time we’d want to be super aggressive with our college savings, most of us simply don’t have the income or resources to be that aggressive early on.
Currently, we’re contributing enough to max out our state’s tax deduction for 529 plan contributions, which is $3,000 per year as of 2020. We’re funding our son’s 529 plan via the bank account bonuses that we’ve been earning this year, so it’s one way that taking advantage of bank account bonuses can really help us right now.
For more information, check out this post I wrote a few years ago: What Is The Best 529 Plan – A Guide To Choosing Your College Savings Plan. I walk through my thought process in much more detail in that post.
College Savings Strategy #2: Selling A House
A second potential college savings strategy works (or might work, anyway) because of our specific situation, but it’s one that I think could work for a lot of young families as well. In my experience, most young families tend to buy their first house, then ultimately sell that house to upgrade to a bigger house or upgrade to a house in a better neighborhood. I’ve rarely seen a family buy their first house and then live there forever.
That’s our current situation. We live in a house that isn’t going to be our forever home and at some point, we are going to move to a bigger house. The plan, however, is not to sell this house, but rather to keep it as a rental property. It’s located in a neighborhood that makes it perfect to rent and it’ll cash flow very well.
Recently, we took advantage of the huge drop in rates and refinanced our mortgage to a 15-year with a 2.75% interest rate. With a rate that low, I’m in no hurry to pay off this mortgage.
What this 15-year mortgage does mean is that, by the time our son is ready to head off to college, we’d have a fully paid off property that, in theory, we could sell. This house probably wouldn’t cover the cost of an elite private school, but it would definitely cover the cost of a state school.
Taxes are something we’d have to think about if we went this route, which is why the 529 plan makes more sense, but it’s a potential option that comes about almost by accident.
Final Thoughts
There are other options we can use to save for college as well. Roth IRAs can be a vehicle to save for college, providing more flexibility compared to a 529 plan. We could also just use our regular savings and income, which is what most people likely do when paying for college.
The important thing to remember is that saving for college isn’t the same as saving for retirement. Your time horizon to save for college is simply way shorter. So, if your plan is to pay for your kid’s college, you really have no choice but to get started from the second your child is born.
The goal is to eventually increase our contributions once we can get ourselves more settled financially. I don’t think we’re going to save over $1,700 per month like that video said we’d need to do, but we still have to save a significant amount if we want to fully cover what we expect the cost of a college education will be in 18 years.
To new parents out there, what are you doing to save for college? Were you able to start saving right away or did it take some time?
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More Recommended Ebike/Scooters
Check out these other ebikes and scooters I've reviewed:
- Urban Arrow Ebike – Last year, I made one of the largest purchases I’ve ever made – I bought a $9,000 electric cargo bike from Urban Arrow. In my Urban Arrow review, I will discuss what it is and why I decided to buy this bike, as well as discuss how impactful a bike like this can be on your journey to financial independence.
- Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
- Hovsco HovBeta Ebike – The HovBeta is a folding ebike with great specs and a lot of interesting features, and importantly, it’s sold at a good price point. I’ve had a blast commuting with it and using it to do deliveries with DoorDash, Uber Eats, and Grubhub. Check out my Hovsco HovBeta Ebike Review.
- Vanpowers Manidae Ebike – The Vanpowers Manidae is a fat tire ebike that I’ve been riding as my primary winter commuting bike and have also been using it to do food delivery with apps like DoorDash, Uber Eats, and Grubhub. After clocking in a decent number of miles with this ebike, I wanted to write a post sharing what my experience with the Vanpowers Manidae ebike has been like. Check out my Vanpowers Manidae Review.
- Sohamo S3 Step-Thru Folding EBike Review – A Great Value Folding Ebike – The Sohamo S3 Step-Thru Folding Ebike is an entry-level folding ebike that offers a lot of value for the price point. I’ve been riding the Sohamo S3 for a while now, putting the bike through its paces, and I have to say, this bike has exceeded all of my expectations. Check out my Sohamo Review.
- KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
- Hiboy P7 Commuter Ebike – The Hiboy P7 is an excellent electric commuter bike that’s offered at an affordable price point. The range and speed of this bike are both very good, so you won’t have any trouble getting anywhere you need to go with it. As a food delivery vehicle, this is also good – with how much range it offers, you’ll be able to work all day on a single charge. Check out my Hiboy P7 Commuter Electric Bike Review.
- Himiway Escape Ebike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Ebike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Varla Falcon Scooter – The Varla Falcon is an excellent scooter that offers a good amount of power at a lower price point compared to more powerful scooters. It’s not exactly an entry-level scooter, nor is it a high-powered scooter. I think it fits somewhere in-between those two categories – an intermediate scooter if I had to give it a category. Check out my Varla Falcon Review.
- Hiboy S2 Scooter – The Hiboy S2 is an excellent entry-level commuter scooter that's perfect for someone looking to save some money in transportation costs and improve their commute. Check out my Hiboy S2 Review.
- Hiboy S2R Scooter – The Hiboy S2R is one of the more interesting electric scooters I’ve been able to test out. It’s not a high-powered scooter, but for an everyday transport option, it’s very useful, especially given some of the unique features that it has. Indeed, for the price, the Hiboy S2R might be the best value scooter I’ve used. Check out my Hiboy S2R Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
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For additional investing app bonuses, be sure to check out the ones below:
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If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
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Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- 5% Savings Accounts. I'm currently getting 5.24% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
- US Bank Business. US Bank is currently offering new business customers a $900 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- Empower. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
I enjoyed this article, Kevin, and thanks for the reminder about tax deductions for 529 plan contributions. I think a lot about paying for college after becoming a dad two years ago.
I’m tempted to quote Stein’s law, “If something cannot go on forever, it will stop,” with respect to ever-rising college tuition prices. But the fact that college tuition has in many cases increased during COVID-19—while classes are frequently online—does not offer much room for optimism. It is my sincere hope that between now and the late 2030s technology will have enabled us to drastically reduce college’s costs. But preparing for the worst while hoping for the best seems to be the only sensible course of action regarding paying for college. I’ll work on having that $550,000 check ready in 2036 when my son is a freshman.
My plan is to contribute to his 529 plan steadily, while also asking relatives inclined to buy him toys for his birthday, Christmas, and other holidays, to consider contributing to his college fund instead. The rental real estate option you mentioned is attractive, and my wife and I are in the very early stages of buying our first rental property.
Admittedly, “get a scholarship” is a pretty lame college savings strategy. But there is one scholarship I learned about after arriving at college that I kicked myself for not being aware of sooner.
High school students who work as golf caddies are eligible for an award called the Evans Scholarship. It provides free tuition, room, and board at very good, generally Midwestern, colleges. What I like best about the scholarship is that it rewards self-starters willing to have a steady job early in life. One of my best college friends won this and graduated debt-free. Not having debt helped him start a successful business soon after college. If my son exhibits any interest in golf, I will encourage caddying and pursuing this scholarship. Worst case, even if he doesn’t win, he’ll make some nice money and learn to work hard during his middle and high school summers.
Some wisdom from someone in trenches. Education is as expensive as people make it. Why not just go to community college and then transfer to university. 2 years in community college is about 2k total, then cheap state school for another 10k-15k total. For overall of 20k tops for 4 year degree? I am an engineer working with other engineers and we have guy graduated from MIT getting paid almost same as the guy from local state school, but MIT engineer has 100k in student loans. Dont let the degree that defines who u are. Education is just another way keeping up with jones, so people can walk around drop big name schools in conversations to impress people, while they have 100k+ in student loans. Engineering degree from no name school goes farther than history degree from harvard. People, dont take it personally, but that’s how it is in work world currently.
Our oldest went on full tuition scholarship. Our youngest got some merit but not enough to cover her private college. While I had also cavalierly said I wouldn’t pay but for certain brands, once we got to this stage and could see how good the fit was, we supported it. If we had gotten into real estate investing earlier, I would definitely have bought rentals that would be earmarked for each kid (we can still do that for future grandkids). But since we didn’t we’re borrowing it at 1.5% variable interest with the idea that our money is better kept invested, and our kid is better off paying for some of that debt anyway.
Thanks for this article! Our daughter is 4, and we also opened up a 529 in our state of Arizona (due to the tax deduction of $4K per couple). We have been maxing it out, and we shared the college gifting dashboard with my mother-in-law, and she’s been contributing each year as well. My mother opened up another kind of account, an Education Savings Account, for my daughter as well, but that’s her savings account so I don’t manage it or anything, and I’m not sure about how it works. I think the big difference is that it can be used for K-12 education expenses as well. I would also like to front-load our 529, but we have less extra income now than we did when we were DINKS, so these few years we’ve been just saving the tax deduction amount. I would like to save up more money this year and truly front-load, but we also have the goal of maxing out IRA contributions each year, and those are also important to front-load. Albeit, there’s more time to save up for retirement than her college costs. I also have a 401k and 457 at work, which I’m far from maxing out, because each has a cap of 19,500. We simply don’t make enough to max out all the benefits, so it does feel like leaving money on the table. Would you max out your child’s education account BEFORE you max out on IRAs?
Hey Tina, I would be maxing out your retirement accounts first before education stuff. There are a lot more ways to pay for college, including just taking out loans. You’ve got fewer options when it comes to financial independence and retirement, so focus on that first.
You should contribute towards your retirement first. There are many ways to fund for college but none for retirement.
Two thoughts:
1. We are fortunate that family and friends often give our kids financial gifts in the $50-100 range for special occations. We deposit this money into their 529s. However, instead of funneling the money through us, those folks could be getting state tax deductions on those gifts if they opened their own 529s for the benefit of our kids. It’s a win-win. The kids get a gift and the givers get a tax deduction for it!
2. Instead of selling your starter house to pay for college, you could consider a cash-out refinance. That’s our back-up plan to pay for all or some of our kids’ college tuition with a few rental properties we have.
(1) Ha,good point, Most people don’t realize they can open a 529 for literally anyone. They could even make the 529 for themselves, then switch it over later.
(2) Not a bad idea either. Most likely, we’ll have enough saved that we won’t sell anything and this house will just continue to be a rental into our old age. Assuming all works out how we hope.
Please update to include the EE bond
Care to elaborate on why the ee bond is good? I don’t know anything about it.
Guaranteed 3.57% after-tax return if you hold it for exactly 20 years and spend the proceeds on college. Best fixed income investment currently available.
I’m keenly following how you’re going about saving for your son – we had a daughter in March. I opened a vanguard account (100% VTSAX), but will revisit the 529. The NV plan seems to be the other good one –
Yeah, based on what I’ve seen, I think most 529 plans are pretty good at this point. There’s enough knowledge now that in general, you can invest for low-cost for future education.
Great article Kevin! We are expecting our first child as well and I have been thinking a lot about 529. I understand there’s a penalty that comes with withdrawing this money later if it’s not used for education and also understand that the money can be transferred to a different name if needs to if our kid decides not to go the college route. However just to play double advocate, is there a reason why you would not go the 529 route? My main concern is the liquidity of the money as well as we don’t know what the future holds for college education. What about other venues like trust fund and or half and half? Thanks!
Someone had a great write up about how oversaving in a 529 isn’t actually as bad as you would think.
https://www.reddit.com/r/financialindependence/comments/hqexle/oversaving_in_a_529_is_a_much_smaller_problem/?utm_medium=android_app&utm_source=share
Thanks for sharing that Josh. This is sort of similar to the example Mad Fientist had where saving all into tax-advantaged retirement accounts, then taking the early withdrawal penalty was still advantageous vs. taxable. I think that was Mad Fientist who wrote that anyway.
I’m pro 529, so you won’t hear many arguments from me about 529s. The reasons why someone might not go 529 is (1) they are worried about the money not being used for education or (2) they want to be able to choose the things they invest in more.
With respect to one, I think the vast majority of people are not overcontributing to 529s. It’s a theoretical problem, but I just don’t think most people are in that position.
With respect to two, some people like having more control over their investments. I still think index funds are the way to go for long-term investing, but I know some people aren’t into that, so that’s up to each person’s individual thinking.
Thank you both that was very helpful