Question 1

How much does college cost and how fast is tuition rising?

Accepted Answer

Average annual costs for 2024–2025 (tuition + fees + room & board): Public 4-year in-state: $28,840. Public 4-year out-of-state: $46,730. Private nonprofit 4-year: $60,420. Total 4-year cost: multiply by 4 (approximately $115,000–$242,000). College costs have risen approximately 4–6% per year historically, roughly double general inflation. At 5% annual increase, a child born today faces costs 40–55% higher in 18 years. A 4-year public school costing $28,840 today will cost approximately $69,500/year in 18 years. The College Board tracks these costs annually at collegeboard.org.

Question 2

What is a 529 plan and how does it work?

Accepted Answer

A 529 plan is a tax-advantaged savings account specifically for education expenses. Money grows tax-free and withdrawals are tax-free when used for qualified education expenses (tuition, fees, books, room & board, computers). Two types: 529 Savings Plans — invest in mutual funds, value fluctuates with the market (most common). Prepaid Tuition Plans — lock in today's tuition rates at participating colleges (limited availability). Contribution limits: no annual limit, but contributions above $19,000/year (2024 gift tax exclusion) may trigger gift tax. Total balance limits vary by state ($500,000–$550,000). Anyone can contribute — grandparents, relatives, friends. SECURE 2.0 Act (2024): unused 529 funds can be rolled to a Roth IRA (up to $35,000 lifetime limit, 15-year rule applies).

Question 3

How much should I save per month for college?

Accepted Answer

Monthly savings needed = (Future Cost − Current Balance × FV factor) ÷ FV annuity factor. Using a 6% return assumption: to save $100,000 in 18 years starting from zero: approximately $290/month. To save $200,000 in 18 years: approximately $580/month. Starting earlier dramatically reduces the monthly burden: saving for $100,000 over 10 years requires ~$610/month vs $290/month over 18 years. Rule of thumb from financial planners: save 1% of the total expected cost per year remaining (e.g., at 10 years out from a $150,000 goal, save $1,500/month — this is aggressive; $500–$750/month is a more common real-world target).

Question 4

What are qualified education expenses for a 529?

Accepted Answer

Qualified 529 withdrawals (federal tax-free): Tuition and fees. Room and board (up to the school's cost of attendance allowance). Books, supplies, and equipment required for coursework. Computers, software, and internet service (if required for enrollment). K-12 tuition (up to $10,000/year per beneficiary since Tax Cuts and Jobs Act 2017). Apprenticeship programs registered with the Department of Labor. Student loan repayment (up to $10,000 lifetime per beneficiary). Non-qualified withdrawals: the earnings portion is subject to income tax + 10% penalty. Exceptions to the penalty: death, disability, scholarship received, attendance at US military academy.

Question 5

What happens if my child doesn't go to college?

Accepted Answer

If the beneficiary doesn't attend college, you have several options: (1) Change the beneficiary to another family member (siblings, cousins, even parents returning to school) — no penalty or tax. (2) Use for K-12 education (up to $10,000/year). (3) Use for apprenticeship programs. (4) Roll up to $35,000 to a Roth IRA (new SECURE 2.0 option, requires the 529 to be open 15+ years). (5) Cash out — earnings subject to income tax + 10% penalty, but principal (contributions) are always returned penalty-free. The worst case is paying taxes + 10% on gains only, which is still often better than a taxable brokerage for growth.

Question 6

Does a 529 plan affect financial aid?

Accepted Answer

529 plans owned by a parent: counted at 5.64% of the asset value on the FAFSA — the lowest asset assessment rate. This has minimal impact: a $50,000 529 reduces aid eligibility by only ~$2,820/year. 529 plans owned by grandparents (pre-2024 FAFSA rules): used to be counted as student income when distributed (50% rate), severely hurting aid eligibility. Under the simplified FAFSA (2024+), grandparent-owned 529 distributions are no longer counted — a major rule change. 529 plans owned by the student: assessed at 20% — worse than parent ownership. Best practice: parent owns the 529, list child as beneficiary.

Question 7

Should I use a 529 or a Roth IRA for college savings?

Accepted Answer

529 advantages: state income tax deduction (in most states) on contributions, higher contribution limits, no impact on the contributor's retirement savings. Best if you're confident the money will be used for education. Roth IRA advantages: contributions (not earnings) can be withdrawn penalty-free for any reason, giving flexibility if your child doesn't attend college or gets a scholarship. Earnings used for education avoid the 10% early withdrawal penalty but are still taxable. Roth IRA funding reduces FAFSA aid less than a 529 (retirement accounts are not counted on FAFSA at all). Best strategy: max 529 first if state offers a tax deduction; use Roth IRA as overflow or if uncertain about college path.

Question 8

How do I choose the best 529 plan?

Accepted Answer

Key 529 selection criteria: (1) State tax deduction — 34 states offer a deduction for contributions to their own state's plan. Check if the benefit exceeds the cost difference between plans. (2) Investment options and fees — look for low-cost index fund options. Average expense ratio under 0.20% is excellent; above 0.50% is concerning over 18 years. (3) You are NOT required to use your own state's plan. Nevada (Vanguard), Utah, New York, and California plans are consistently rated top by Morningstar and Savingforcollege.com. (4) Performance track record — check 5 and 10-year returns vs benchmarks. (5) Direct-sold vs advisor-sold: direct-sold plans have lower fees and are generally preferred for DIY investors.

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