Why you should choose a 2-year 529 plan

10 Sep

You have a baby. You immediately start thinking about your future and theirs. You decide to get a 529 plan. But like most financial matters in life, most of us are too busy to really understand what our options are. So we follow the herd. We sign our baby up for a 4-year college plan. And we don’t look back.

I’m writing this to let you know something about the 529 plan that I think is often misunderstand.

The beauty of a 529 plan is it locks you into today’s college rates. With college tuition rising 11%+ each year, in 18 years this will be a bargain. But let’s say your baby is like me. They know exactly what they want to be and major in the moment they step foot in class.  Is the 4-year 529 plan really the best choice? No it isn’t!

The 529 plan in Virginia (I think it might be safe to assume this applies to all states, but check for yourself to be certain.) covers your tuition for general classes. Think History 101, English 101, and Government 101

But if your kid has already decided they want to be an engineer, a nurse, or even an advertising professional, then the 4-year plan isn’t really for them. Why? Because, it doesn’t cover their core classes. So when they start specializing and taking those very specific classes geared toward their major, your 529 plan is no good. If you chose a 4-year plan, then let’s say core classes start their junior year. You have about 25,000 left in your 4-year plan starting their junior year. The inflated cost is now $100,000 for your kid’s junior and senior year. That $25,000 you have left gets applied to the actual present day $100,000 cost–leaving you with a bill of $75,000.

If you’re like me and thinking WTF, well, it’s better to know now than 18 years from now.

In addition to 529 plans, states offer additional programs to cover things beyond tuition like room and board, books, meals, etc. Virginia offers a Cordova Plan. Essentially you pick a mutual fund, dump as much money as you want into it and whatever it earns you can apply it toward any college related costs.

Putting aside the tax advantages of 529 plans for a moment, I don’t understand why I put money into a mutual fund run by educational people. I mean, why wouldn’t you invest money with a financial company that eats, sleeps and dreams about finance–like T. Rowe Price or Fidelity. Personally, I chose the T. Rowe Price Retirement 2050 fund. I figured they are a solid company. Plus, the fund is in my name. So if my son turns out to be a disrespecting asshole who decides he want to drop out and travel the world, well then it just means more money for my nest egg and he’ll know know the better.

I hope I’m not turning you off from investing in a 529 plan. I think they’re great. Especially because if you kid decides they don’t want to go to college, it’s transferable. Not to mention again, the great tax benefits.

Whatever you do, do not procrastinate on this. Start it as soon as your baby takes his first breath of air. Every year you put it off, it gets more expensive because college tuition rises every year. We took $3,000 from our tax refund and it got our son’s 2-year 529 plan down to $125 a month. Then I invest in mutual funds. I don’t think we’ll be able to cover everything. But our parents didn’t give us a dime towards our college and so we feel like even being able to pay for 3 years, hopefully 4 is good enough. After all, repaying student loans suck.

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