Are College Savings Plans Even Necessary?

That’s my son there. The one with the mustache and low student loan debt.

It feels amazing finding new ways to save money on taxes.  Tax deductions and credits are the government’s way of kinda rewarding us for doing things that are beneficial for society.  The government believes that saving for retirement is important, so they allow for 401k and some Traditional IRA contributions to be deducted from your income.  They think having children is generally good for society, so they will give you a tax credit for bringing a child into the world.  And if you have a business, you can get a tax break for having lavish steak dinners!  Because you know, they help your business grow, thus helping society.

Besides those federal tax benefits, there are also some state tax benefits.  And one of the big ones is the deduction you receive from contributing to a state college savings account, also called a 529 plan.  Some states feel it’s beneficial to have college educated citizens, so they will allow a state tax deduction for 529 contributions.  Not all states allow this deduction (I guess they don’t like education), but luckily I live in one that does so I take advantage of it.  But it wasn’t always like this….

Rewind to November of 2012, about 6 weeks before my son was born (little bugger came two weeks early and messed up my FSA strategy but that’s a story for another day).  I read that you could start a 529 plan for an unborn child, which sounds weird but is cool because I was itching to get all the tax benefits a child offered.  So I signed up for Maryland’s 529 plan before he was even born and started contributing.  Pretty cool that I could contribute towards his college costs while he was still a fetus.

Then I started reading about 529 plans a little more in detail.  There is a pretty large camp of personal finance bloggers and gurus that are dead set against it.  I was kind of surprised at this because I always thought of saving for your kid’s college education as a good thing, but it seems it’s not for everyone.  The standard response against contributing to a 529 plan I read was that you should only do it AFTER you have built up a good emergency fund (which makes sense to me), AFTER you get rid of all of your debt and AFTER you are able to save for retirement.

Basically, your kids college education costs are last on the totem pole.  Besides, they can get scholarships or student loans to pay for school.  This started to make a lot of sense to me so I halted all contributions to the 529 plan and shifted it elsewhere.  This felt good for a while, but I did some soul searching and realized that I do in fact want to contribute to my child’s education. I feel it will help my family and even the world (I’ll explain this later).  Contributing to a 529 plan seems like an old school thing to do, and I realized that I am kind of old school.  Here’s why I decided to change course and start contributing to a 529 once again:

• I never had one.  All parents want their kids to be better off than themselves.  It’s just a natural inclination.  I feel the same way and I would do anything I can, within reason, to make sure my son has the best opportunity to succeed.  And I believe contributing some money once a month until he goes to college is a very reasonable thing to do.  I got through college by working and taking out student loans, which was fine but it would have been nice to get a $20,000 boost or so from the get go.  I would like to provide this for my son, and it makes me feel content that he will be able to get a head start that I never really had.

• I HATE student loans.  I make my distaste for student loans pretty clear on this blog, as I have written about the best way to pay them off and the correct mindset you need to pay them off.  The interest rates for student loans keeps going up and up, and all they do is decrease your purchase power and really hamper your ability to invest early on in life.  Genes are pretty powerful, so I have a feeling my son will come to hate them alongside with me.  By being able to contribute to his college costs and lessen his student loan debt, I will be doing him a great service.  And I will be helping the economy (and thus the world) too since having a society with too much student loan debt hurts every economic sector.  Except banking of course.

• Tax break.  As I mentioned earlier, Maryland provides a state tax deduction for contributions to the state 529 plan.  I look at a 529 plan as basically a Roth IRA for education expenses.  You contribute with after tax funds, and your earnings and contributions grow tax free.  Then when you withdraw for qualified education expenses, you don’t pay taxes either.  Pretty good deal.  Add on the additional state tax deduction, and it becomes an even sweeter deal.

• It’s pretty painless.  The aforementioned state tax deduction for Maryland is capped at $2500 for the year.  So that’s my contribution goal.  Divide that by 12 months, and it comes to a $208.33 monthly contribution.  Definitely swingable.  If I keep that up until he’s 18 and don’t even count any earnings, that will be $45,000 towards college.  A nice chunk of change that will not strain my monthly budget too much.  Any future disposable income I get will likely go towards my own student loans, so I don’t see myself adjusting this unless they raise the tax deduction cap.

• It increases net worth.  If you’re looking to improve your long term financial standing, you need to keep your net worth going up.  It’s a lot more fun to think of decisions in terms of net worth rather than how much money you have in your checking account.  Contributing to a 529 plan will help my net worth tremendously by increasing my investments along with getting the yearly tax break.

Some would argue that one of the main purposes of existence is to make more people.  Keep the human race going kind of thing.  Just giving birth to a child is a big sacrifice for the mother, and there will be a lot of sacrifices to come for the parents as the child develops.  The conventional wisdom is to make sure your retirement is secure before you start contributing to a 529, but that leaves a whole lot of unanswered questions.

How much money do you want to live on during retirement?  When do you want to retire?  Will you be willing to work part time during retirement?  Do you want to retire at all?  Does this mean you can’t contribute anything to a 529 plan until you reach your retirement “number”?  I went through these questions, and in the end I realized that I would sacrifice a lot for my son.  While I certainly don’t want to be a “burden” for my son by being an old and poor man, I feel my personal situation makes it okay to contribute a little bit each month to help my son financially when he’s transitioning into adulthood.

I know I’m going way back here, but writing this post reminds me of a scene from the movie I Robot with Will Smith, who plays a guy named Del (thank you IMDB).  In the scene, Del is trying to save a drowning child.  They both end up getting in trouble, and the rescue robot then arrives.  Through cold and heartless calculations, the robot determines that there is a much greater chance of saving Del’s life compared to the child.  He then proceeds to rescue Del, and the child is left to die.  While deciding whether or not to contribute to a 529 plan isn’t nearly as dramatic, I’d like to say that there was a little bit of self sacrificing Will Smith in me that guided my decision.