Am I saving enough for my daughter's education?
I live in NY and have a 9 year old daughter. I have saved $100K for her in a NY 529 Plan for college. I currently contribute $750/month into this account. Do you think this is sufficient enough savings for me to be able to fund a 4 year undergraduate education? Ideally, I would like to be able to support her full tuition at a good private school. I know it's difficult to predict the cost of college, but my personal calculation puts college costs at ~$70K/year in 2026.
Saving for a child’s college education is a major planning objective for many families. The unfortunate truth is that the cost of higher education has risen rapidly over the last few decades. The current average annual cost for a private 4-year undergraduate institution is ~$48,000 per year, including room and board. If we assume this costs inflates at a rate of 5% per year, you would be looking at a cost of ~$75,000 in 2026, increasing to ~$85,000 in 2029 when your daughter is a senior. Assuming an annualized rate of return of 5.7% per year, which will not happen year over year, you would need to save an additional ~$10,000 per year or $830 per month to meet the anticipated cost.
Now there are a lot of variables here that you should consider. First, recent legislation has been passed where New York families with incomes up to $125,000 may not be required to pay college tuition for SUNY and CUNY schools. You may be outside of these income limitations, and the law can change in the next 9 years. Second, even if that is the case, the average in state tuition for a SUNY school is ~$24,000 per year, including room and board. If your daughter decides to go to a SUNY undergraduate institution, it is arguable that you have already achieved your college savings goal. Third, you specifically mentioned a 4-year undergrad education, but have you considered whether or not your daughter may want to pursue an advanced degree?
To develop some optionality in your financial goal plan, you may want to consider savings vehicles outside of a 529 Plan. I recently wrote an article about the different methods of funding college education. This outlines some of the other ways you could think about college savings. Please feel free to contact me if you would like to discuss this in greater detail.
First of all, congratulations on doing exactly the right thing. So few people save enough, and your daughter is very fortunate to be facing a future without student loans.
But two things: First, evaluate the returns you are getting in that 529 account. My experience with 529s (and I do not know the NY fund) has shown that the rate of return has been pretty disappointing. Since you have 10 years, it really matters (a 4% annualized return will grow $100,000 into $148,000, but 6% will turn it into $179,000).
And second of all, you should question your assumptions about where tuition will be in 10 years. I looked at the 10 most expensive colleges for 2006-2007, or ten years ago. The average was about $36,000 (tuition, room and board, and average incidentals). That is, college has nearly doubled in the last 10 years. Don't assume it will stop growing. It's not out of the question to think that a year at a top private university will cost more than $100,000 in 2026.
You're doing great and $750/month is really solid. That said, I would start game-planning how your daughter can earn income at some point (if you're a small business owner, hire her to shred papers or something), and develop a Roth IRA reserve for her.
Just like a 529, a Roth is contributed to with after-tax dollars and the growth is tax free as long as withdrawals are after age 59.5 or are for qualified education expenses (like a 529). The downside is that, unlike the 529 plan, there's no state income tax deduction for a Roth contribution, but the upside is that if the cost of college is less than you've saved, your daughter will have a Roth retirement plan going at a very young age. This could clearly be tremendous for her at even modest return projections.
The challenge clearly lies in figuring out how she can earn income, as that's the requirement for being able to deposit to the Roth.
If you'd like to get into specifics, feel free to shoot me a message and I'll be happy to provide what I can.
Adam Harding, CFP
I'm somewhat concerned about what the cost of college may be in the future. Technology is rapidly changing all other industries, meanwhile the value of a degree is falling relative to the rising cost of tuition.
Aside from the fact that a bachelor's degree is a requirement in many fields, I think we may continue to see education options outside of traditional college for many jobs. For most others, it may be that alternatives bring the cost of college down going forward.
While things may not change much in the next few years, I would caution against saving too much to a 529. The investments, restrictions, and expenses are not ideal. Savers lose out on tax benefits, we saw in NY the possibility of state-funded tuition that is always a possibility.
To my mind, you have a great downpayment. Hopefully, your daughter's plans align with yours at age 18. I personally might look to accounts with multiple purposes at this point. If you are eligible for a Roth IRA, I would make sure to maximize that, in addition to any workplace plans you may be eligible for.
There are a number of calculators available to help determine the anticipated cost of a private university education. Your daughter is still young, you have 7 to 9 years left to plan for her. You are certainly off to a great start. If you get close to your target, you should also consider allocating the funds for her in a conservative manner as it would be a tragedy for an unfortunate market event to hurt your planning.