One thing I have always tried to get better at is anticipating the future. I do this as an investor and try to see what the world might look like five, ten, even twenty years from now. The earlier you can see the curves ahead, the better you can adjust before you crash into a guardrail.
Recently I had a revelation. After being unable to take investment gains (not principal) to pay for a new $50,000+ car after my old car was causing too many problems, I came to a startling conclusion. I might have the same problem when it is time to pay for college with our children’s 529 plans. In other words, even after diligently saving and investing for 18 years for them, I might still fail at spending the money when the time comes.
For those curious, I recommend contributing to a 529 plan. It is a tax-advantaged way to make college more affordable in the future. If you have leftover funds, there is now the option to convert a portion into a Roth IRA. What is not to like?
The real dilemma is figuring out how much to fund each 529 plan. Consider this post a cautionary tale about the predicament overfunding can quietly create.
The Ultimate 529 Plan Funding Challenge
When I think about the largest financial burdens for parents, three categories always come to mind. Housing. Healthcare. Tuition. These three costs often determine a families sense of comfort or stress for decades.
So the logical steps are straightforward. Get neutral real estate by owning your primary home. Work for an employer that provides generous healthcare benefits. Save aggressively for your children’s college expenses.
If you want to eliminate the fear of not being able to afford your child’s dream university one day, then aim for this stretch goal. Contribute enough so that the total balance matches the current four year cost of the most expensive private university today. Once you do, your college expense should be essentially set. In most periods, a balanced 529 portfolio has a strong chance of matching or outperforming rising tuition costs.
That is what I’ve done. In 2017 and 2019, when my two children were born, I super-funded both plans with this philosophy. My parents also contributed every year. And once five years passed after super funding, we started giving the maximum annual gift again.
Reached My 529 Plan Goal
Fast forward eight years. Each 529 plan is now worth over $400,000, equal to the total cost of four years at the most expensive college. The bull market has helped tremendously. But so has delaying gratification in buying things we don’t need, like a new car for the past 10 years.
The most expensive private university currently costs about $100,000 a year, all in. Based on the math alone, we should be in good shape. There will be downturns where we lose years of gains. But over the long run, we should be able to cover college fully between 2035 and 2041 through two 529 plans.
By covering our own college costs, this also frees up financial aid dollars for families who truly need help. That feels good.
Managing Expectations For Your Child
Some people believe that contributing enough to match the cost of the most expensive private school is overkill. Perhaps.
Based on my observations, life is only going to get more competitive due to AI and globalization. What a tragedy it would be if your child worked incredibly hard to get into their dream school, only to realize they cannot attend because you are short on money.
Given young children have almost no ability to earn, save, or invest for themselves, parents must do the heavy lifting. And as a parent, you cannot expect your child to win grants or scholarships. You cannot expect your child to be a prodigy in an instrument or a sport. You cannot rely on the trends of college admissions aligning with your family’s background at the time.
The only things you can control are saving aggressively, educating our children with practical skills, and preparing for the worst.
If your child does receive merit aid or attends a school far cheaper than expected, leftover 529 funds can be passed down to a sibling or even a future grandchild. In fact, using a 529 for a grandchild is one of the most impactful gifts you can give. It reduces their financial stress decades before they are even born.
Your 529 plan contributions don’t just disappear if you overfund and don’t want to change the beneficiary or roll the money into a Roth IRA. If you want the money back through a non-qualified distribution, you simply pay ordinary income tax on the earnings plus a 10% federal penalty on the earnings. Your original contributions come back to you tax-free since you already paid tax on them.
You Might Not Actually Be Able To Spend The Money
Here is where things get interesting. After being unable to use investment gains to pay for a new car after my 10-year old one started causing problems, I realized something deeper is going on. Even when we have the money, it is emotionally difficult to spend it. I fear I will freeze up when it is time to spend the 529 money, even though that is the whole purpose.
College tuition today already feels usurious. With modern technology, why does it still take four years to earn a degree We have unlimited access to information online. We can take entire courses for free from the best professors in the world. Yet tuition is rising at twice the pace of inflation. How does that make sense? We should be able to earn a college degree in three years at most, saving us 25% in the process.
Meanwhile, AI is eliminating millions of entry level jobs. If your kid graduates with a degree that does not align with the future labor market, he might return home just like many of the adult children I have seen in San Francisco.
Over the past 25 years, every neighborhood I have lived in has at least one or two adult children who moved back in because they could not find a job that paid enough. They then end up staying with their parents for 5-15 years.
I am not arrogant enough to think my kids will magically escape this trend. The investor side in me would feel stupid to have paid so much for college only to have this result. Although, the father in me would love to have my children come home because I will have missed them dearly.
A College Decision Thought Experiment
Let us imagine a scenario. Your child gets accepted early decision to a private university ranked in the top 50. You are proud. Your spouse cries tears of joy. You feel validated as a parent after 18 years.
Then the offer letter arrives. No need based aid because your household income is slightly too high. Yet you do not feel wealthy. You live in an expensive city, work hard, and pay taxes out the nose. Your expenses grow every year. You might feel like you’re scraping by despite making multiple six-figures a year.
Let us say the school is Boston University. Your household makes $350,000 a year in Boston. You save diligently and drive a modest car. You work 50 hours a week and constantly travel to see clients. Your mortgage is high. Groceries cost a fortune. The total cost of attendance is about $95,000 a year after tax. Thankfully, you have a 529 plan worth $400,000.
Are you truly going to feel comfortable spending almost $100,000 a year for four years if your child can attend U Mass Amherst for $38,000 a year, all in?
I doubt it.
You have talked to dozens of parents whose kids graduated from Boston College, Boston University, Northeastern, Brandeis, Babson, Bentley, Wellesley, and other private schools in the region. 75% of their kids are underemployed. Most are not working in the fields they studied. Some are living at home.
To spend over $400,000 for a degree only to graduate into an AI ravaged labor market feels reckless.
You still believe in college. You still believe in the experience and the friendships and the growth. But you do not believe in a $400,000 gamble when a $160,000 alternative exists.
So you send your kid to U Mass Amherst despite their protest. You keep $240,000 in the 529 plan. You slowly roll the rest into a Roth IRA for your child to use in adulthood. They graduate debt free. They are not suffocated by expectations. And they have money to start their life.
That feels like a much better trade for those who do not receive any free aid.
Fixing My Car Was My Own Public School Decision
When I finally repaired my 2015 Range Rover Sport for $1,900 instead of buying a new vehicle for $50,000+, it reminded me of choosing a public university instead of a private one.
If I decided to YOLO and buy the latest Range Rover Sport for $115,000 out the door, that would be the private university without free financial aid decision. One decision is about desire. The other is about long term pragmatism.
In my WSJ bestseller, Buy This Not That, I suggest parents earn at least seven times the annual net tuition cost if they want clarity on what is affordable. In ten years, the most expensive private university tuition will likely be $150,000. Without free aid, private school effectively becomes a luxury good – one that starts to make sense only once your household income clears about $1.05 million a year. Earning seven figures is highly unlikely for dual unemployed parents like us.
Back in the day, my parents paid $2,800 a year in tuition for me to attend William and Mary while my private school friends were paying $20,000. At the time, my dad even said William & Mary felt like a great deal. I turned out fine. So yes, I am biased toward the lower cost option for my children.
If the 529 plan becomes increasingly flexible, the temptation to save money and use it for more practical things will only grow stronger.
When I Would Actually Spend The Full 529 Plan
After running through this thought exercise, I realized there are only two situations where I would feel comfortable spending the most of the 529 plan on an expensive private school with no aid.
First, if the 529 plan grows to at least twice the amount needed for the full four year cost of the school. For example, if the 529 plan grows to $1 million and the total cost of college is $500,000. Then not spending half of the 529 plan on its intended purpose would feel silly.
Second, if my passive income grows to at least twice our desired household living expenses. With that much excess money without having to do much, then splurging on an expensive degree is more digestible. Because in this scenario, I would be able to pay for the cost of college through passive income.
These are the only two variables that would allow me to accept what is likely a low financial return. A larger net worth would be nice, but net worth is mostly illiquid. What truly matters is income and cash flow.
Ideally, I want my kids to have some skin in the game. They should feel the weight of their decisions by paying for some of their college expenses.
When I was young, I knew my parents were not wealthy. We lived in a regular townhouse and drove an 8-year-old Toyota Camry. As a result, I chose a public school. I knew that if I graduated jobless, I could work at McDonald’s and pay them back.
So what do you think? After years of saving and sacrificing to fund your children’s 529 plans, will you actually be able to spend the money on an expensive private university, despite the declining ROI? Or will you find ways to optimize, save, and make the dollars last longer even if you can afford the fancy option?
Plan For College The Right Way
One tool I’ve leaned on since leaving my day job in 2012 is Empower’s free financial dashboard. It remains a core part of my routine for tracking net worth, investment performance, and cash flow. Now I’m using the tool to help plan for paying for two college tuitions.
If you haven’t reviewed your investments in the last 6–12 months, now’s the perfect time. You can run a DIY checkup or get a complimentary financial review through Empower. Either way, you’ll likely uncover useful insights about your allocation, risk exposure, and investing habits that can lead to stronger long-term results.
Stay proactive. A little optimization today can create far greater financial freedom tomorrow.
Empower is a long-time affiliate partner of Financial Samurai. I’ve used their free tools since 2012 to help track my finances. Click here to learn more.
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
