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College is expensive. Right now the average cost to attend a state public university over four years is close to $40,000. Private school is even worse. The average cost is almost $135,000. How do you plan to pay for your kid’s college education?
Now I’m going to sound old. But, when I graduated from college in 2003, the amount that I paid in tuition in fees did not exceed $10,000 over four years. In less than 15 years, tuition and fees have almost quadrupled. That is unbelievable to me.
Rising Cost of College
Here is the worst part. The cost for college is suppose to continue to escalate. While experts don’t predict that college tuition fees will go up by 4x, they are projecting it to rise substantially.
In 18 years, it is currently projected that four years at a state public university will cost almost $95,000. That is more than double what it is now. Private school tuition will be even more, at a cost of $325,000, which is almost 2.5 times the current cost.
When I read those figures, it gave me pause as I take a big gulp knowing that I need to set aside $100,000 over the next 18 years. And we plan on having more than one child. It makes me wonder how am I going to be able to do it.
After we finished filling our house with baby items upon the arrival of our little guy, I started to think about the future more and more. From my research, I found that in the state of Virginia, I am able to contribute to a 529 college savings plan.
There are two main ways that I could invest in a 529 through Virginia.
InVEST offers the ability to invest in an account where your child can use the account to pay for qualified higher education expenses. This plan is especially appealing. Your child has the ability to go anywhere that he or she wants for college. Additionally, through this plan you have multiple options to invest in stocks, bonds, and even target allocation when the child graduates from high school.
This prepaid account only allows for your child to attend a public university or college in Virginia. Through this plan, you are able to prepay for tuition for the future, which is extremely appealing given the continual rise of college tuition recently. However, with the lack of flexibility and not wanting to limit my child’s options for college, we chose the inVEST option.
As a quick side note, I am most familiar with Virginia 529 plan options, but many other states have similar plan options to the ones listed above.
One of the my favorite things about the 529 plans is that it is able to grow tax-free. That means you pay no income tax as your contributions grow and no income tax when you use the funds for the beneficiary’s qualified higher education expenses. Beneficiary expenses include tuition, fees, books, supplies, and equipment required for study at any accredited college, university, or vocational school.
In addition, account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year. Doing quick math, if you contribute $4,000 per year for the next 18 years you will have accumulated $72,000 in the account. Yes, that’s a huge amount for college. But, just think, if you contribute $170 every two weeks for the next 18 years, this is the amount that will be available.
The Virginia 529 plan, however, allows you to not just save cash but also invest in multiple investments. After doing some research, I decided to invest our son’s account in a stock index. If the stock index performs historically similar to the S&P 500 of 8% a year, I anticipate the account would be worth $216,000 when he is ready for college. Given the trajectory of rising college costs, I may still end up paying some out of pocket, but I believe this 529 plan will be worth it.
One of the things I really don’t like about the inVEST program through Virginia is that my fees for a stock allocated account is 0.37%. While the Virginia529 inVEST account is nearly twice as much as a similar Vanguard stock account at .19%, the advantage for me is that I am able to deduct the $4,000 each year, which makes up the difference in fees for me. Although, it would be really great if Virginia pushed harder to reduce those fees to be in line with Vanguard.
Have you set up a 529 plan, or any other sort of college-savings plan, for you child? Please feel free to leave your comments below.