Cost of College Calculator

Previously I wrote about my newborn daughters projected college costs in the year 2035. If any of my fellow Millennial parents out there have done this, I assume there was sticker shock for you as well. The future college costs numbers are truly staggering. Now that I know what my daughter’s costs ranges are 18 years from now, I now have to figure out how exactly I go about hitting those numbers.

529 College Savings

Luckily I opened a 529 savings plan for my daughter when she was 6-days old, and I now have 18 years of compounding interest on my side. So let’s start crunching some numbers to see what exactly I need to contribute each month to my daughters 529 college savings plan.

In-State School #1

$170,000 (Tuition and Fees Only)

The first in-state public university I would like to send my daughter to costs $170,000 for four years’ worth of tuition and fees (no room and board).

$420 per month contribution x 18 years @ 7% annual return = $170,000

$310,000 (All Expenses – Tuition, Fees, Room and Board)

If I want to pay for all college expenses for my daughter at my first choice of colleges, that price tag would be $310,000. And that costs would include tuition, fees, room and board.

$760 per month contribution x 18 years @ 7% annual return = $310,000

In-State School #2

$92,000 (Tuition and Fees Only)

The second in-state public university I would like to send my daughter to costs $92,000 for four years’ worth of tuition and fees (no room and board).

$225 per month contribution x 18 years @ 7% annual return = $92,000

$111,000 (All Expenses – Tuition, Fees, Room and Board)

If I want to pay for all college expenses for my daughter at my second (much cheaper) choice of colleges, that price tag would be $111,000. And that costs would include tuition, fees, room and board.

$275 per month contribution x 18 years @ 7% annual return = $111,000

I Opened a 529 for My Baby at 6 Days Old!

I don’t use this Millennial personal finance blog to brag about anything I do financially, whether it be via investing or my professional career and my salary. However, I do want to take a minute to pat myself (and my wife) on the back because we just opened a 529 college savings account for our newly born daughter, who is less than one week old. To be exact, she wasn’t even six days old actually!

529 college savings plan

I know there may be some naysayers out there, considering you can technically open a 529 college savings plan prior to your child’s physical birth. You can open an account long before you even have a child or the minute you find out you’re expecting. I was fully aware of this option but I just couldn’t bring myself to opening an account for a baby we hadn’t had yet. I know the risks are ultra-low of complications with the baby, but I just felt like it was a possible jinx if I opened a 529 before my baby was born. But I was determined to open a 529 nearly immediately after she blessed us with her presence.

Oddly enough, I actually opened my account for my 6-day old the same way you would if you opened a 529 college savings plan for a child 6 months before birth. I didn’t yet have a social security number for my daughter, which along with a name and birthday is all you need to open a 529 college savings plan. So instead I opened the 529 and assigned myself as the “student”, aka the beneficiary of the plan. Once I have a social security number for her I can then transfer the account over into her name. Any transfer within your family is free of charge. It is no different than the transfer policy from one child to another due to one child receiving a scholarship and deciding not to attend college.

The process for opening my daughters 529 college savings plan could not have been easier. I was able to quickly setup the account and connect it to my bank account via a routing and account number. I easily setup an automatic monthly transfer that begins this April. And then I setup an auto increase on her birthday each year. So beginning in March 2018 I will contribute $25 more each month, and then again in 2019, 2020, etc. I was then able to make a one-time contribution to kick start my daughters 529 college savings plan.

Automate Your 529 Savings Plan

I love automating my savings goals and this 529 plan allowed me to do this effortlessly. I will now be contributing to my daughters 529 at least monthly and that amount will go up each year to ensure I save as much as possible. We hope to receive some “college money” as gifts for her birthdays over the years from grandparents and other family members as well. We can then easily log in and make a contribution to her account when that happens. Its great.

Future Cost of College Calculator

And I am going to need all the help I can get to afford college in 18 years (year 2035). I played with a future cost of college calculator and the projected costs are unreal. Seriously, unreal what the anticipated costs of college would be in 18 years. For an in-state public university in my state, college tuition is expected to range from $92,000-$170,000, depending on the university, in the year 2035. Again, these ranges are only for in-state public school, nothing private, and these costs are only for tuition and fees, no room and board. If I want to pay for all college expenses (tuition, fees, room and board), that will run me anywhere from $111,000-$310,000 for four years of college. Wish me luck…at least I opened her account when she was 6-days old so I now have compound interest on my side.

Public School vs Private School?

Recently I was getting together with some buddies of mine to catch up over a few beers. Funny how much our conversations have changed over the years, considering I am expecting my first child, my other friend is expecting his second daughter, and another already has two kids. So now family and kids dominant the conversation these days, which is great actually, because previously is was more trivial issues like sports, weekend events, golf, and boys’ trips. Boy has life changed for us over the last few years!

I previously wrote about saving for college and deciding between a 529 plan or a Coverdell Education Savings Account (ESA). Well, my friends and I spoke about this a bit as well and the 529 won out across the board, solely because of the contribution limits, which was my conclusion as well.

Public School or Private School?

The talk of saving for college brought up a more philosophical education question for your child; public school or private school? And now that conversation includes not just college but high school and even earlier “private” education. When I looked up the cost of private schooling the results just floored me.

To give you some background and my group of friends and me, we’re all obviously Millennials and we all grew up together in middle to slightly upper-middle class city. We all went to public high school and a state university. The one caveat is one of my really good friends did go out of state for college and went to an Ivy League school, which is a phenomenal feat and probably most parents’ dream. So good for him and his family on accomplishing that. He is the one outlier in the group though as we’re all “public school” educated and doing fairly well in life, both personally and professionally for now being out of college for 10+ years. All of our careers are moving in the right direction.

Now back to our philosophical question of public versus private schooling. My one friend said they are 100% planning on sending their two daughters to private school, and by private school I mean early childhood education. Not just private high school. The yearly tuition rates at the school he will send his two daughters to is astounding. See for yourself.

2016-2017 TUITION

Pre-Kindergarten (full day): $18,820
Kindergarten (full day)-grade 5: $23,510
Grades 6-12: $25,430

I fully understand tuition is different for every child because of grants, financial aid, etc. But either way, those numbers are jaw dropping in my eyes when you consider public schooling, kindergarten throughout high school is free (except for a few minimal annual schooling fees).

Is Private School Really Better Than Public?

I have three “sibling” in-laws, two sisters and one brother, all of which are public educators. My two sister in-laws teach young elementary aged children, while my brother in law teaches high school students. All of them are very passionate and one has a master degree in childhood education. I’ve talked to each of them multiple times about the difference in public versus private and a lot of the variance is purely on curriculum (and funding, obviously). A public school has a set teaching curriculum to follow, whereas a private school can change to emphasize some subjects over others (like science and math).

I think the main misnomer about private school is that the teachers aren’t exactly “more qualified” thank teachers at public schools. In reality, there are actually more requirements and standards for public schools then there are for private. I think people think most teachers at a private high school are equivalent to a professor at a university and their background in the field (formal education and research). That is simply not the case.

Public School is Just Fine

I will get off my soapbox now as being very anti-private schools, because it’s obviously ever families own personal decision to do this. If you have the funds to send your child to private school, by all means go for it. But don’t profess that your child is getting a substantially better education than those of us sending our kids to public school. Your child can still get into a great college when going to public high school (see my great friend who made it to an elite Ivy League school). And they can still be successfully when going to public school all the way through college. Me and my friends are all doing fine and I know tons of people who were “publicly” educated.

I just urge all Millennial parents to really research and think twice about private school. It feels way more of a status symbol than an educational play, in my opinion. At the end of the day, your child is as successful as you want them to be, regardless of public or private. If you are highly involved in your child’s schooling, homework, and lives in general, I think they will be just fine.

Being Involved As a Parent is What Matters Most

That is my humble advice from a soon-to-be parent. I will be sending my child to public school, but I will be as involved as humanly possible with their schooling. I want to push my child to work as hard as possible in their schooling and studying. I know that will guarantee more success in life than which particular school they attend.

529 vs ESA for College Savings Plans?

I am lucky enough to be a newly expecting parent this coming year. My wife and I are thrilled about the joy a baby will bring to us (and the challenges too, of course). We’re less than two months away from the anticipated birth of our child, and it feels like its going to be here any minute now the way time is flying by!

This past summer once we found out we were finally expecting, my first thought was, “wow, a baby is going to be expensive…how are we going to afford this?” We’ve been avid savers and budgeters for some time now so I had to figure out how I’m now fitting two more huge expenses in my month budget; diapers and college savings.

Like most new parents, the thought of college comes to mind fairly quickly, despite it truly being 18+ years away! But I know I want to address the issues ASAP versus delaying our savings plan. My parents did not save any money for me for college. They took on the brunt of student loans (and are still paying on them to this day).

I actually feel like they are miserable because of it too. My parents were never really open about college when I first began applying 15+ years ago. We didn’t really discuss anything about who was paying. I just applied, got accepted and they took control of the rest. Turns out I paid for most of my tuition and they paid for my room and board, as well as some other expenses.

I vow not to do this with my kid when this time rolls around. I was naive and had no idea just how much college cost and who was paying for it. My parents and I never really had those discussions. So here I am now trying to figure out how I can set money aside early and often to hopefully pay for as much college as possible for my soon-to-be child.

What is the best way to save for college?

529 College Savings Plan

529 plans are tax-advantaged savings vehicles that let you save money for the college expenses of a named beneficiary, such as a child or grandchild.

529 Contribution Limits

One of the primary benefits of 529 plans is its large contribution limits. Each state operates its own 529 plan and makes its own rules for the plan, so maximum contribution levels vary across plans. Generally speaking, contribution limits are high enough that most investors will never have to worry about hitting the ceiling.

Coverdell Education Savings Account

A Coverdell ESA is a tax-advantaged savings vehicle that lets you save money for the qualified education expenses of a named beneficiary, such as a child or grandchild. Qualified education expenses include college expenses and certain elementary and secondary school expenses.

ESA Contribution Limits

The annual contribution limit for Coverdell ESAs is $2,000 per beneficiary until age 18.

529 Plan vs Coverdell ESA

After doing my research on the two college saving vehicles, I lean much more heavily on the 529 plan. My main reason for choosing the 529 plan is because it has significantly more potential for future savings. If you maxed out an ESA account, which is $2,000/annually or $166/month, and earned an annual return of 7% annually, your savings would reach $67,726 after 18 years. That is still a nice chunk of change for college.

However, don’t you think during that 18 year span you can challenge yourself to save more than $167/month? Maybe not in the first few yeas but certainly shortly after you can find a way to scrape together $200-300 each month for your child’s college fund. With the same assumptions as above (7% annual return), your investment could be worth $122,396 after 18 years if you managed to save $300/month. That makes expensive college look a lot more affordable.

What if you had $300,000 of student loan debt?

I was recently listening to a Dave Ramsey Show podcast where a young couple called in with a debt problem. If you’ve ever listened to Dave Ramsey, and I encourage you to do so, you know he affectionately refers to himself as “get-out-of-debt-Dave”. Well, he certainly had his hands full with one couple from the South…

A young woman called in to Ramsey’s show and explained their mountain of debt. They had, wait for it, $300,000 in student loan debt! That’s obviously an exorbitant amount of debt for any college graduate. Dave immediately asked who the doctor or lawyer was because you would assume the only way to accumulate that much debt is with 8+ years of schooling. The caller quickly replied with “neither of us”. It was all accumulated getting their undergraduate degrees!

Now neither the caller nor Dave Ramsey went into their schooling and just how two undergrads could rack up that much debt. They were more focused and the game plan of getting rid of it as soon as possible. I checked and the average cost of a private college education is $33,480 (for 2016/2017). And that is only tuition and fees and does not include room and board. This means to get a degree from a private university it would cost you $133,920 if you complete your undergraduate in four years. Let’s double that tuition number for this couple since there are obviously two of them, which brings their grand total for tuition to $267,840. That final bill is still a bit shy of $300K. But let’s assume the remaining $33,000 was used on room and board.

On top of their student loan debt they also had a $300,000 mortgage and approximately $40,000 in car loans. Their joint income was rather solid though coming in at $140,000. Either way, they have a really, really long way to go. Their scenario is very daunting. I would assume their putting out about $4,500/month toward their debts (student loans, mortgage, and car). That’s remarkable.

All of us Millennials are dealing with the current student loan crisis with our own piles of debt. But this is just ridiculous to have $150,000 of student loan debt coming out of college. No college degree is worth that. This couple will be paying back their student loans for 20+ years more than likely. I believe they have no one to blame but themselves. Well, maybe their parents too for allowing them to make this college decision. As noted above, the average cost of private college is $33,480. The average cost of a state university is $9,650, which is less than one-third of the cost of private. A business degree is a business degree. An engineering degree is an engineering degree. Your degree is what you make of it. You personally are your biggest professional asset, not necessarily your degree and where you went to school.

I hope this story and your own personally story opens up your eyes for the future. I am a soon-to-be parent and I will open a 529 college savings plan for my child. This is something my parents did not do for me. I did however go to an in-state public university and my child will as well (or perhaps a trade school if they so choose). Millennials, I urge you to help curb this student debt issue. Save for your child’s education now via an ESA or 529 account and make them choose an in-state, public university.

Aggressively Pay Down Your Student Loan Debt

I regularly listen to Dave Ramsey’s podcast, who affectionately refers to himself as “Get-out-debt-Dave“. I’m blown away at the number of Millennials who call in with mounds and mounds of student loan debt. Most Millennials have tens of thousands, if not well into the hundred of thousands. Its absolutely absurd.

Student Loan Debt is Not a Pet

Back to Dave Ramsey, who constantly barks are his callers telling them not to treat their student loans like a pet and keep them around for as long as possible. I’m a Millennial and I’m guilty of this as well. For years I never paid more than my monthly requirement. I really had no reasoning for this either. I regret it to this day that it took me as long as it did to payoff my student loan.

The Tax Deduction Is NOT Worth It At All

Like I mentioned, I really had no reasoning for not making extra payments towards my student loan. However, I constantly read and hear Millennials saying that there is no reason to make extra payments because the interest is tax deductible. That is utterly ridiculous.

The average Millennial coming out of college now has $25,000 of student loan debt. To pay that back over a 10-year period at $280/month with a 6.8% interest rate means you end up paying $33,600 or in $8,600 in interest. All of that roughly translate to $900 of interest per year, all of which is tax deductible. However, your actual tax benefit equals $225. Not really worth it to keep paying the minimums on your student loan is it?

Secrets of Next-Door Millionaires

Below is a list of some of my favorite money/personal finance articles from this past week. I’ve sifted through boat loads of articles on money, retirement, personal fiance, budgeting, building wealth, paying off debt, and buying a home.

All of the below articles are highly relevant to the Millennial generation (Gen Y) and their money. Knowledge is power, and you are your single greatest investment, so continue to educate yourself on money and personal finances right here on this very blog so you can one day become financially independent.

This week’s best articles on money and personal finances, specifically for Millennials

Secrets of Next-Door Millionaires

Next-door millionaires weren’t born into wealth. They haven’t invented killer apps or won the lottery, exercised a pile of stock options or played professional sports. They’re the majority of millionaires, and they include teachers, small business owners and professionals who accumulate wealth gradually over time. They’re often in their 50s or 60s before their net worth ticks over to seven digits. (NerdWallet)

Jonathan Clements offers a prescription for a ‘happy, successful financial life’

We all like to think we’re rational when handling money, but there’s ample evidence that suggests otherwise. We struggle to save enough. We become unnerved when the stock market goes down. We think we can outperform the market averages. We buy possessions not just for their utility, but also because of how they make us feel and what statement they make about us to the rest of the world. This maelstrom of greed and fear leads us to spend too much, earn lackluster investment results, and end up with an unnecessarily messy financial life. (Vanguard)

3 Things a Personal Finance Class Can’t Teach You

Personal finance classes are a great idea for consumers, especially youthful ones, who need to understand investing basics or credit management. However, the grasp of basic concepts that revolve around dollars and cents is not necessarily a guaranteed path to fiscal sense. Human nature can often derail the best of intentions aimed at achieving a perfect credit score or building a substantial retirement nest egg. There are some things that a personal finance class teaches, and there are others that typically need to be culled from is experience. (Investopedia)

Make Six Figures? There’s a Decent Chance You’ve Got Almost Nothing in the Bank

It’s hard to feel sorry for someone making six figures, but a new survey attempts to drum up some sympathy for the deflated bank accounts of these high rollers. Close to half of those who earn from $100,000 to $149,999 a year have less than $1,000 in their savings accounts. Some 18 percent of them have socked away absolutely nothing. (Bloomberg)

How to Save for College Without Sacrificing Retirement

Should we save for college or for retirement? And while any financial planner would say that the right choice is crystal clear — retirement is the priority, because there are student loans and other sources of funding for college — it feels at odds with the instinct to put your kid first. (NerdWallet)

Enemies of investment success

Intuitively, we believe we get better products and services when we pay more for them. This perception may be accurate in most facets of life, but the relationship breaks down when it comes to investing. In fact, lower-cost investment funds consistently outperform higher-cost alternatives.¹ The former leave more money in our portfolios, to grow when financial markets gain value. (Vanguard)

Happy reading, my fellow Millennials.

Pay off debt or invest for retirement?

This is one of the biggest financial questions not just Millennials, but all American’s ask themselves. Should I pay off my debts (student loan, car loan, credit card) or invest for retirement?

Nationally renowned “financial coach” Dave Ramsey has his baby steps, which clearly state to pause ALL retirement contributions until your debts are paid off (everything except for the house).

I agree with most of what Dave Ramsey lays out. Although, I vehemently disagree with passing up any possible 401(k) company match. If your company offers a match, you should 100% take advantage of that first and foremost. Invest the minimum percentage to get the employer retirement match, which is usually dollar for dollar up to 6%, and nothing more after that.

Below are the steps I layout that work best for a Millennial prioritizing their debt payoff versus their retirement investments.

1) Invest in your employers 401(k) plan IF they offer a company match. Invest the minimum amount needed to receive the maximum match (nothing more, nothing less). If your company doesn’t offer a match. Skip to #2.

2) Payoff your debts in order from lowest to highest balance. Ignore the common advice of taking your highest APR and paying that off first. No. You want to see results versus tackling the highest rate (which could be the highest amount as well). Throw as much as you possible can, like an uncomfortable amount of your monthly income, at the lowest debt/loan you have. Pay the minimum on all other debts until the smallest balance is paid in full. Then move on to your second debt and repeat the same process.

3) Once you are debt free, except for your house, contribute to your retirement plan or a Roth IRA. If you have the company match and you’ve already completed step #1, your next task is to now open up a Roth IRA. A Roth IRA is a retirement account where you contribute after-tax dollars so that your investment grows tax free. So at age 59.5 you may withdraw from this Roth IRA and pay zero taxes on your distributions. A huge benefit! You’re allowed to contribute $5,500 into a Roth IRA as of 2016. I would strongly advise to contribute 20% of your gross income towards retirement, including your company match. So if you contribute 6% to your employers 401(k) and receive a 6% company match, you need to place another 8% into a Roth IRA.

4) Once your retirement plan is on cruise control at 20% of your income, invest your remaining available funds into a 529 college savings for plan for your children. Anyone who has had student loans knows that potentially removing that burden from your children is a powerful thing. Your retirement absolutely comes first though because there are no loans to live on in retirement, but you may take advantage of student loans to get your child through college if your savings is lack luster or non existent. If you don’t have children (yet or don’t plan on it) skip to #5.

5) Now is the time to throw all remaining funds you possibly can at your house and get that mortgage paid for. Your debts are paid off. Your retirement is in great shape. Your kids college appears to be virtually paid for. Now is the time to achieve the ultimate financial goal…a paid for house! Work diligently to get that home free and clear so you can finally be financially independent.

6) Invest. Invest. Invest. Now that you are completely debt free and have a paid for house, its time to max out all retirement savings accounts and some. You know officially have no more payments to make to anyone, other than yourself. Continue to make payments…to yourself and invest that money like crazy. The maximum contribution one can put towards their 401(k) annually is $18,000 ($24,000 if you’re over 50). The max for a Roth IRA is $5,500 ($6,500 if you’re over 50). If you’ve maxed both of those out and still have money leftover, open up a brokerage account and invest in a low cost index fund (which you should be doing anyways!).

Follow this plan and you will be more wealthy than you even thought possible.