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What is the maximum, reasonable amount one might put into a 529 college savings account for the benefit of a single future student?

529 accounts have maximum allowed balances between $235k and $400k depending on which state's plan is being used. Given that the most expensive college in the country only costs $61k per year, the former would fully cover four years, and the latter would cover it almost twice over. Unless you expect the student to pursue a master's or doctorate, funding up until the allowed max would be too much.

My question is about how much the account would need to be considered fully funded, so for instance you could make a ratio of what percent of fully funded you've got so far. There are already other questions on this site about whether a 529 is a good idea at all, how to prioritize it against retirement accounts, etc.

Of course the answer is going to depend on a lot of assumptions. If you're trying to fund the account as early as possible, so that the tax-free gains are maximized, you're just going to have to make some guesses. Of course you can't predict if your child will go to grad school before they've even entered kindergarten.

Here are some assumptions one might make, but they're just suggestions; feel free to contradict them.

  • Four years of tuition, fees, books and supplies, room and board at an out of state public university.
  • College cost inflation and investment returns will both be the same over the next 18-20 years as they were over the last 18-20 years
    • A simplifying assumption could be that future investment returns and college cost inflation will be equal. I haven't yet researched to know if this is a reasonable assumption or not.
      • "Between 2005-06 and 2015-16, published in-state tuition and fees at public four-year institutions increased at an average rate of 3.4% per year beyond inflation, compared to average annual rates of increase of 4.2% between 1985-86 and 1995-96 and 4.3% between 1995-96 and 2005-06." Source: http://trends.collegeboard.org/content/average-rates-growth-published-charges-decade-0 "Tuition and fees and room and board" grew slower, at 3.4% and 2.8% for the past two decades.
      • Schwab estimates that large cap stocks will return 6.3%, bonds will return 3.3%, and inflation will be 1.8% in the long-term future.
      • The after-inflation return of a 60/40 stock/bond portfolio is 3.30%, just 0.17% less per year than the historical college costs for the last two decades.
    • Therefore, I conclude that it's not unreasonable to assume investment returns will about equal increases in costs.
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    At which school, assuming how much increase in tuition rates before that time? Tuition rates have been going uo significantly faster than inflation. My alma mater's tuition has gone up almost 7:1 since I graduated, admittedly 30 years ago. Pick your assumptions about schools, society, the economy... – keshlam Feb 29 '16 at 1:42
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    There's also the potential for law school, medical school, extra years as an undergraduate, ... Seems like this is subject to a lot of personal assumptions and speculation. What are you looking for in an answer? – user32479 Feb 29 '16 at 6:53
  • Thanks for the questions. I hope I've answered them. Any projection two decades into the future is going to be subject to a lot of assumptions. So I'd like to see answers that document the assumptions and/or have them as inputs into a formula. – stannius Feb 29 '16 at 20:36
  • @Joe are you referring to choosing between contributing to a tax-deferred retirement account vs. contributing to a post-tax 529 account? – stannius Mar 1 '16 at 19:14
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    @stannius Yes, I am. Nevermind. :) (Though some states do allow the contributions to be deductible, but I imagine that pales in nearly all cases to the value from the federal tax free growth.) – Joe Mar 1 '16 at 19:44
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OK, maximum reasonable amount (sort of an oxymoron the costs are not reasonable) is going to be end game more around $180K (2016 dollars) with the parameters you listed. My son is going to college next year so we did a little looking around the last couple of years.

Consider higher growth rates the first 10 years, then you would pull back on the aggressive portfolio as the child neared college.

First, (IMO only) costs in most public schools will not track up as fast over the next 25 years due to market pressures. A bubble now exists with a disconnect between value and cost of higher educations and Internet learning and reorganization of Universities may push this down over 10 years. Private schools can be another world though... it's like trying to reason out why someone would pay $1000 for a baby stroller. That perceived incremental value beyond the $200 stroller is there and folks that can are shelling out the dough. So private schools could continue to rise in cost. Wouldn't be surprising to see a further stratification of private higher ed 20 years from now.

Given that, if you don't want to over fund the account, shoot for $100K then re-adjust about 6 years out.

Federal Rules for reference: https://www.irs.gov/pub/irs-pdf/p970.pdf 529 plans have additional state rules so check with plan admin for help on these.

Remember: In addition to tuition, books,fees, room&board,... now computer equipment and Internet services (2015 statute change) needed/used for college and be paid by plan dollars in most cases.

Over funding risk is reduced when you consider the 529 plan as part of estate planning. Extra funds can be inherited (simple POD account declaration in most states). It's possible for child to inherit 529 assets then use them for his children, and down the line by creating new accounts and transferring within the rules. The advantage of 20-40 years of tax free growth may be available (well if the laws don't change).

  • Nice detailed answer, but you first said $180k, then later dropped to $100k. Quite a difference . – JTP - Apologise to Monica Mar 2 '16 at 3:34
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    @JoeTaxpayer looks like 180k was the reasonable maximum estimate, 100k was the "don't overshoot" goal – briantist Mar 4 '16 at 14:22
  • There are also tuition assistance plans to keep students in-state for students with good grades. Including that, four years tuition, room+board and books at our flagship state school is currently $56K. – RonJohn Sep 20 at 15:47

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