College Savings Plan and Update

My wife and I are planning to make about $200,000 available for our son’s college education. We have put away $10,000 a year each year of his life, and depending on the yield in his 529, he should have that money long before we actually need it. I have no idea how much college will cost, but that number should get him most of the way to at least a 4 year degree.

Before I go deeper into numbers, I want to make some general statements. He does not have to go to college. Most of my family, and my wife’s, are tradesmen and blue collar in general. It’s good work, and some of it pays more than a lot of white collar work. Still, a lot of that work needs a good technical education and 529 money can go to that.

Students can use a 529 plan to pay for trade school programs offered by a college that is eligible for Title IV federal student aid. This includes many cosmetology schools, technical colleges, culinary schools and even a golf academy. Students can search for eligible trade schools using the Federal School Code Lookup Tool.

If parents originally set up a 529 plan to save for a child’s 4-year college degree, they may still withdraw funds tax-free to pay for trade school expenses. If there are leftover funds in the 529 plan after trade school is paid for, parents can change the beneficiary to a qualifying family member, use the funds to continue their own education or take a non-qualified distribution and pay income tax and a 10% on the earnings portion of the withdrawal.

So the way I see it, we will only need to add about another $50,000 to get him to $200,000 in 12 more years. He’s a kindergardener now. I could see us needing to add another $10,000 in 2026 or later, but realistically, since we’d not use all of the money in year 1, we would be able to earn more money in years 1 and two at least if not a bit more in year 3 of college.

We’ve already added $10,000 this year to his account. His grandparents add some money each year, but that’s not a significant number. We check in on this once a year, and sometimes more frequently, but only a few times a year. They send us quarterly updates. There are not many options for us in our state, and I have about 60% of the money in the US market. 20% is in bonds, and 20% is in non-US stocks. This will change over time, but with so many years to go, I am not worried.

We do not count this money we add, the $10,000, as part of our savings rate, as it’s not our money. However, if we did, it would increase what I call our savings rate.

We started this account about 9 months after he was born and since then, we’ve earned about 44.81% on the cash we invested. Last year, we got 19.2%, and over 3 years, we got 29.04%. Obviously, the market has done exceedingly well over the last few years, so I do not expect these rates to continue. As you see above in my chart, I expect a reversion to the mean over the next 12 years. Worst case sceneario, if we end up adding too much money, then we can just take it back with some penalty on the earnings. I don’t see that as the end of the world considering the amount of money we invested.


1 Comment

  1. We didn’t save specifically for our two kids’ college expenses. We saved aggressively but always in our names — accounts in the kid name are penalized more heavily for financial aid calculations. Now that our kids are 18 and 24, we know this approach worked out fine for us, but I realize that everyone has a different situation. In hindsight, the one thing I would change is to have been more aggressive with real estate investing earlier on b/c had we bought a property at the birth of each kid, we would have paid down the mortgages within the 18 years to college (if we did 15-year loans), and then the rents could be the college payments. We didn’t start investing in real estate till the kids were much older but it still helped us smooth out the college expenses b/c there is still some rental profit, just not as much as if we had started earlier.


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