In late May, my husband and I welcomed our first child, Edward James Robinson. We’re calling him Ned. After the first few weeks of sleepless nights and a very steep learning curve, the hospital bills came. They’re only the first of many expenses involved in raising a child—and they’re chump change compared to the anticipated cost of putting Ned through college, beginning in 2031.
According to this calculator from CNN Money, sending a child to one of my alma maters (UNC or NC State) for four years starting in 2031 will cost $133,197—including tuition, fees, room and board, books, and supplies. If I start saving today, I’ll need to sock away $2,031 per year in a tax-free 529 account until Ned’s 18 to meet that goal.
But if current trends continue, the real cost will probably be much higher. The CNN calculator is really just adjusting the current cost of a public university ($12,841 per year) for 18 years of average inflation. But for the past three decades, the cost of college has risen faster than the pace of inflation—about three times faster, in fact.
What’s a new parent to do?
Our first step is to make a plan—now instead of later. Will we pay for all of Ned’s college or just tuition? What will we do with the money if Ned gets a scholarship, decides to forego college, or take a non-traditional route? Will saving for Ned’s college affect our retirement savings?
After thinking it over, we’ve decided to save for tuition and fees only. Not only will it make our goal more attainable, having to pay for some of his own expenses will give Ned some skin in the game when he makes decisions about college. And halfway to the goal (when Ned’s nine) we’ll reassess our plan—by that point, the predictions for the cost of college may be more accurate.
We’ll also encourage Ned to take a few steps to decrease the cost of school, like taking AP courses, online courses, or maybe even participating in Early College. I outlined some other ways to save here. If he shows special academic, musical, or athletic talent, we’ll encourage him to hone those skills in order to compete for scholarship money.
Fortunately, there are some tax-advantaged options for us save for Ned’s college tuition, in case a scholarship doesn’t materialize:
- Coverdell Education Savings Accounts: Parents may contribute up to $2,000 a year to a Coverdell account for a child under 18. Contributions are not tax deductible, but growth and withdrawals for qualified expenses are exempt from federal taxes. The downside, of course, is that the $2,000 limit means that a Coverdell account won’t keep up with rising tuition rates. (And it isn’t even high enough to cover the full cost of Ned’s in-state school, much less private school.)
- 529 Plans: Most states, including North Carolina, offer 529 college savings plans, and many are open to residents of any state. Parents’ money grows tax-free, and withdrawals for qualified expenses are exempt from federal taxes. Some states even offer prepaid plans, which let parents pre-pay all or part of the costs of an in-state public college education. (They may also be converted for use at private and out-of-state colleges.) Each state determines its own lifetime contribution limit, ranging between $100,000 and $270,000. We opened an account for Ned last week with just $25.00 (the minimum) and set up automatic monthly drafts from our checking account. We’ve also printed out a few stubs so that others can contribute. (Hint, hint, grandparents!)
Private banks offer options as well. Upromise, a service from Sallie Mae, allows members to earn money for college by spending money at Upromise partner companies—including online stores, restaurants, grocery and drug stores. I’ve had a Upromise account in my own name for several years, thinking it would be useful for my graduate school education. But since I never ended up using the money, I can now transfer the account into Ned’s name. I’ve only saved a few hundred dollars so far, but it hasn’t cost me a penny!
Our plan isn’t the only way to go. In fact, there are two big drawbacks. First, the more we save, the less likely Ned will be offered an institutional scholarship or discount because we will have saved up the “expected family contribution.” And every school he applies to will know that, thanks to the FAFSA. Second, by using a 529, we are locking money into an account that can only be used for educational expenses. If we take the money out for any other reason or if Ned doesn’t need it for college, we’ll incur taxes and penalties.
Of course, the biggest factor in paying for Ned’s college is out of our hands: the tuition bubble. If it bursts, as Jane Shaw predicts here, then Ned will be in good shape from a few savvy investments we’re making early on. And he’ll probably have more options than just brick-and-mortar schools. If not, then our meager savings will only defray his whopping tuition bill. I’ve got my fingers crossed that Jane is right.