Please note that the writer is not a financial advisor. Topics mentioned here are merely suggestions. You should perform your own due diligence, or seek reputable, professional financial advice when saving for your child's education.

According to Forbes magazine, the average cost of attendance at a four-year institution in 2016 was $104,480 over the four years. That’s compared to $26,902 in 1989. It appears the annual cost has been increasing at a rate of 2.6% between 1989 and 2016.[1]  So if you have a child starting kindergarten in 2019, you can expect that amount to reach $157,540 by the time they are ready for college. Now wait, take a deep breath. There is hope! If you start saving early enough, you might be able to make a dent in the cost of college tuition.

Let’s Start with the 529 Plan

Created in 1996, the state-run 529 plan was developed as a tax-advantage method to save for the higher education of a beneficiary. In Oregon we have two choices: the Direct-Sold and the Advisor-Sold. The Direct-Sold, also called the Oregon Savings Plan, is the most common and cost effective. You can contribute from $25 to $310,000 over time. In general, there is an annual fee of 0.25%, with investment fees ranging from 0% to .0466% of the total. Oregon taxpayers can take deductions on their state-based taxable income for contributions into the plan. In 2019, the limit is $2,435 for single filers and $4,865 for married couples filing jointly. There are age-based portfolios that make investing easy, the risk decreases as the child nears college age.

You can make contributions via payroll deduction or monthly contributions. You can even have family members make gift contributions. Total contributions may not exceed $15,000 a year to qualify for tax exclusion, which would total $180,000 if you contributed the maximum amount for grades K-12.

Qualified Expenses

Withdrawals may be made online, by mail, or by phone and can be sent directly to the school, to the beneficiary, or to you. Qualified expenses include tuition, books, software, supplies and equipment, and certain room and board expenses. If you make a withdrawal that does not meet the criteria for a qualified expense, you could be subject to taxation and a 10% penalty. Otherwise, your withdrawals are tax free, as is any growth the fund accumulates.

If you have multiple beneficiaries and are sure they will go on to college, you may wish to establish separate accounts to plan accordingly. Otherwise, if your first child decides not to pursue a college degree or doesn’t use all of the money in the account, you can assign the account to another beneficiary. You could even roll it over to a niece or nephew if you like. An additional benefit for the 529 plan came from the 2018 tax reform bill. Now you can use your state 529 plan to pay for private K-12 tuition. The earlier you start saving, the better.

The Big What If

But what if there’s a chance your little one might not go to college? Of course, it’s impossible to know what adult choices your child will make when they barely know how to tie their shoes. You can consider your family culture in determining the value they may place on higher education, but even that may be unclear. If you end up not needing the funds in your 529 plan, you may withdraw them and then be hit with the 10% penalty in addition to federal income tax. (Note: If your child receives a full scholarship, the penalty is waived). Another option for those who will be receiving a pension or invest in an IRA, is to set savings aside in a Roth IRA (or two if you are married). You may contribute up to $6,000 a year ($7,000 if you are over 50), it will grow tax free, and you may withdraw your contributions at any time for any reason. If you start in kindergarten, you can save up to $78,000 by the 12^th grade (assuming an annual limit increase of $500). That may not be $157,540, but it’s better than nothing! Then if your son or daughter decides not to go to college, your Roth IRA remains a part of your retirement portfolio. 

Be Realistic

Keep in mind, using Roth IRA funds is only advisable if you don’t plan on needing that money as part of your retirement plan. It’s never a good idea to risk your own future for your child’s higher education. There will be opportunities for them. Universities like Purdue are starting to offer income-share agreements to their students. In these scenarios, the student takes out a loan where they agree to re-pay a portion of their tuition using post-graduate income for a set number of years. There are also scholarship opportunities available to determined and organized students. Finally, there are work-study programs and jobs a student can take that allow them to contribute to their own education and get some “skin in the game.” If your child has a passion for their education...together you can make it happen!

Visit the following sites for more information on 529 plans:

https://www.irs.gov/newsroom/529-plans-questions-and-answers

https://www.oregoncollegesavings.com/

[1] Camilo Maldonado, “Price of College Increasing Almost 8 Times Faster Than Wages”, Forbes, Forbes Medial LLC, July 24, 2018, May 15, 2019