We are expecting our first child later this year and I am starting to explore my options for college savings. No telling what it may cost 18 years from now so I don’t want to get caught with my pants around my ankles.
Any advice or suggestions? We are firmly in the middle class income-wise so I don’t have a ton of disposable income but would like to start putting money back for little one’s education in the most advantageous way possible.
A few thoughts from when I looked at it:
- I'm not sure if it changed, but when I first looked at it, the way I understood it is that the Mississippi prepaid tuition plan did not really guarantee you tuition. Up until your child is like 13, they had the option of returning your money with a certain return guaranteed (that wasn't that high). So unlike the earliest versions, you weren't really protecting against massive tuition inflation, but if tuition inflation lagged stock market returns, you didn't get money returned to you. That was enough to make me not want to do the prepaid tuition option when they were really young.
- I'd hesitate to do anything towards a 529 unless and until you are maxing out your retirement accounts. If you and your wife are fully funding Roth IRAs, you can at least pull the principal out. Worst case scenario you will have 200k of principal to pull out after 17 years (assuming no law changes, which I don't think the ability to access principal after five years will go away with respect to amounts already contributed). Not saying you need to max out two 401k or 403b's and two Roth IRAs if you both have access to them, but at least max out the Roth and do some towards a 401k and make sure you are on pace to have enough for retirement by around 62 before worrying about college expenses. Lots can change in the next 18 years with regard to college costs and options for paying for it, but I don't think needing a funded retirement is going to change.
- Don't get too freaked out about historical college inflation. Somebody still has to be able to afford college, so the historical inflation rate for college tuition can't continue into the future. I think the scam of loading kids up on guaranteed student loans to let college costs run rampant has almost run it's course. To the extent it hasn't, there will probably continue to be options with junior college (or even better, joint high school and junior college programs that let people graduate high school with an associate's degree) that will give some manageable options.
- Think in terms of diversity. College costs could continue inflating wildly (which obviously I'm skeptical of, but it wouldn't be the first or 1,000th time if I end up being wrong) or it could lag inflation as people stop requiring a better ROI to pay for college (which I'm also skeptical; I think we're at a reasonable equilibrium and it's going to continue around inflation). My goal is to try to prepay for two years of college for each child. If the stock market outpaces tuition increases, then yea I will have done worse on the money I spent on prepaid tuition, but at least I didn't do worse for a full four years worth payments and college can be more than paid for. If tuition increases outpace stock market returns, then I at least guaranteed two years of tuition being paid for, and we can either supplement our investments with cash flow for the other two years or if that's not an option, look at junior college for two years to minimize the pain.
- Don't put too much pressure on yourself to pay for everything. That will be great if you can, but having a little bit of student loan debt isn't the worst thing. Should hopefully keep them focused on earning enough money to repay it. The average undergraduate with debt from a public university still graduates with less than $30k of debt. That's not fun but it's extremely manageable. The student loan nightmare stories typically come from people that do some combination of going to private colleges, getting economically worthless degrees, getting advanced degrees, not graduating after taking on the debt, and/or becoming disabled after graduating.
- If you have family that are the type of people that would want to help with college expenses, putting enough into a 529 to get the fund started might be worthwhile because then while the child is young they can throw small amounts into it. Our kids got a lot of crap that wasn't necessarily cheap when they were under 5 from relatives that likely would have thrown money into a 529 if we had given them the option. They may not want to do it once the kids get old enough to appreciate the gifts and who they are coming from, but while they'r etoo young to know the difference they might. Probably not going to make a huge difference unless you have very generous relatives, but might end up being enough to cover books a semester or two without you or the kids giving up anything you really miss.
Not sure any of that is helpful, but that's where I am on it after looking into it.
