Save For College

Research suggests that people with college degrees have lifetime earnings that are hundreds of thousands of dollars more than those with just a high school diploma, so college seems like a good idea overall. Unfortunately, college is becoming every more expensive in the US. Studies have shown that over the past few decades the increase in the cost of college has far outstripped the increase in inflation. The median annual cost of college in 2023 is about $35,000 a year. A four-year college degree will cost a student $140,000. Private schools cost much more.

Meanwhile the median US household income in 2023 is about $70,000. Before taxes. Having one kid in college therefore costs parents a full 50% of their pre-tax income and an ever larger chunk of their post-tax income.

Add to that the average American family has kids less than 3 years apart, and it's not at all uncommon to have two kids in college simultaneously which means that well over 100% of the median family's pre-tax income will need to go to college for kids. Of course since parents are not the US government, they can't run giant budget deficits or print money, they have no option but to take student loans.

Spiralling college costs have resulted in near unavoidable and onerous student loans and consequently, student debt. This results in fresh college graduates starting out in life, not with a zero bank balance but a massive negative bank balance of tens - occasionally hundreds - of thousands of dollars. Your kids are going to have spend years and years servicing their debt before they too have money left over to buy index funds and become millionaires in their own right in their own time. How can you help? Consider a 529 College Savings Plan.

College 529s are a relatively recent phenomenon having only begun in 1996. Again, 529 is the section of the IRS code that set up the rules. In short the rules are that the money must be post-tax contributions and your money grows tax-free and can be withdrawn tax-free as long as it is used towards educational purposes. That's the high level but there are a lot of other rules that you can and should read through about contributuon limits (in short: very high) and what to do if you kids don't go to college or money is left over after they finish college and so on (in short: you don't lose the money)

Other than this, it is like a 401(k). You can choose to invest your contributions in a variety of options though by now you know that the best option is a low-cost passively-managed index fund! Going back to our compound interest calculator and plugging in an initial contribution of $2500 to start a 529 when your kid is born and adding $300 every month will result in about $140K by your kid's 18th birthday - assuming an inflation adjusted 7% rate of return.

As always, markets are fickle and there are years when the market drops 20% and if that's a year the year in which your kid turns 18 and starts college, that's going to really hurt. At the above rate of contribution i.e. $2500 to start and $300/month means you have invested about $67K in total that grows to $140K - more than double. Even a lousy year with a 20% drop means the $140K is worth $112K leaving a much smaller $28K gap for 4 years of college vs not saving at all for college. The worst ever single year drop in the market was in 2008 during the financial crisis when it fell almost 39% (gulp!). Your 140K would drop to $85K leaving a $55K gap for 4 years of college. As bad as that sounds, remember that in the very next year, i.e. 2009, the market rebounded almost 24%. And then, another almost 13% in 2010. So you'd have had more money for your child's sophomore and junior years.

We're getting to the end now. You've maxed out your 401(k), funded your 529s, put your extra savings in a low-cost passively managed total market index fund and things are starting to look good. You are on your way to being a totally unglamorous and unknown index millionaire. That's the way to do it! And now your thoughts turn to philanthropy and you'd like to find a way to help others who weren't born with the privileges you had or didn't catch the breaks you did. Or maybe you want to Save The Whales. Or the Amazonian rainforest. Whatever. Here are some thoughts on how to effectively give back.