Common Sense: Dollar & Sense

Saving for College

Issue: January/February 2019

Author: Joel M. Schofer, MD MBA CPE FAAEM
Commander, Medical Corps, U.S. Navy


Only a small percentage of students get enough financial aid to cover their tuition, housing, books, and fees. As a result, saving for college is a major finan - cial goal for many people. Luckily, it is as easy as three numbers ... 5-2-9, as in using a 529 plan. 529 plans allow parents or grandparents to put money aside in a tax advantaged way that can later be used for college.

How Expensive is College?
In 2014, the average family paid $13,461 for college, which was only 64% of the total cost of tuition, room and board, and other expenses. For the 2014-15 school year, the average public college cost $18,943 while a pri - vate institution cost $42,419. If that wasn’t enough, educational costs are increasing at a 6% rate annually.

“The amount you’ve saved for college has much less of an impact on your financial aid than your overall income does. In other words, physicians with high incomes will be expected to pay for at least part of college regardless of whether they saved for college.”

How Can You Limit Costs?
You can join the military and transfer your GI Bill benefits to your kids. That is my plan ... two kids ... two GI Bills ... done.

If you don’t look that great in camouflage and don’t want government funded vacations to warzones, one other consideration is to get your kids to go to a state school. You’ve gone to college and medical school. Do any of your patients or colleagues really care where you went? Mine don’t. State schools are just fine.

529 Plans
The money in 529 plans can be invested in stock and bond funds. As long as the withdrawals are used for qualified higher educational expenses, the investment gains are free from federal taxation. As of 2017, you can contribute as much as $14,000/year to each child without incurring the federal gift tax. In addition, you can pre-fund up to five years of these contributions, or $70,000 in one year. Couples can give $140,000.

Sound too good to be true? Well, it is true, which is why 529 plans have come to dominate the college saving game.

Downsides of a 529 Plan
If you don’t use the proceeds of your 529 plan for educational expenses, your gains are subject to income tax and a 10% penalty. In addition, col - leges will consider 529 assets when determining need-based financial aid. If you believe you’ll be eligible for financial aid, you might be better off keeping the assets in your name or the names of the grandparents.

That said, the amount you’ve saved for college has much less of an impact on your financial aid than your overall income does. In other words, physicians with high incomes will be expected to pay for at least part of college regardless of whether they saved for college.

As Usual, Taxes and Costs Matter
Not all 529 plans are perfect. Each state offers a plan, and you can use the plan from any state. You are not limited to the one you live in.

There may be some state tax benefits if you use your state’s plan, but just like with all investments you have to see if those tax benefits out - weigh the other features of the plan. Some states have high fees and expenses or have less than optimal investment options. Some states give you tax benefits no matter which states’ plan you use.

Which 529 plan do I use? Regular readers would guess that I use which - ever state’s plan is run by Vanguard, and they’d be correct! Vanguard administers the Nevada plan, which is what I use. They also provide management and services in the Colorado, Iowa, Missouri, and New York plans. Many states, though, offer Vanguard and other low cost investment options.

You find a lot of good information on 529 plans at: http://www.saving -

Other Types of Accounts
Table 1 is a great table from the Vanguard website that compares ben - efits offered by 529 plans against various other types of accounts people use to save for college (see next page).

As you can see, while there are other options, the 529 offers the most benefits. Some people advocate using Roth IRAs, whole life insurance, or ultra-conservative investments like certificates of deposit (CDs) or savings accounts, but this is generally a bad idea.

(Source: )
  529 Plan Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) General Investment Account Education Savings Account(ESA)
State tax breaks X      
Federal tax breaks X     X
Low financial aid impact X   X X
High contribution limits X X X  
Earning potential X X X X
Access to your money X   X X
Age-based options X      
Total flexibility   X X  
Account control X   X X

You need your IRAs to save for retirement, not college. Saving for retirement is your top priority, even over funding the college education of your children. You can borrow money to pay for college, but you can’t borrow money to retire.

Life insurance is expensive and generally offers very low investment returns. CDs and savings accounts aren’t expensive, but their investment returns are just as anemic. With educational inflation at 6% annually, it will be hard enough for stocks and bonds to keep up let alone life insur - ance or CDs/savings accounts.

What’s the Bottom Line?
529 plans have become the go-to account for most people saving for college. Go to to find out which state’s plan is right for you. If you’d rather just use your GI Bill, let me know. The Navy’s hiring.

If you’d like to contact me, please e-mail me at or check out the two blogs I write for, and .

The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Department of the Navy, Department of Defense or the United States Government.


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