By Alaina Trivax, WCI Columnist
More than 70% of 2021 graduates left medical school with at least some student loan debt, according to the Association of American Medical Colleges. The median debt burden among these new physicians, not including undergraduate debt, was more than $200,000. These statistics have certainly touched my family and, as the math suggests, have impacted many other WCI readers, as well.
My husband, Brandon, is a PM&R physician working in private practice, and I teach at an independent school in southeast Michigan. Brandon and I certainly know the impact of student debt. He took out some loans to pay for his bachelor’s and master’s degrees, but most of his debt is from medical school. Even at a state university, the costs were still significant. I attended a private college for my undergraduate schooling; I was offered a scholarship package that made it the second cheapest option. Still, I graduated from there with around $30,000 in student loans. I went on to pursue a master’s degree and received a scholarship that funded almost all of it. Given that I was also working as a middle school teacher, I could cash out the tuition bill balance, and ultimately, earned this second degree without any debt.
After all of this education, Brandon and I ended up with a combined total of more than $330,000 in student loans.
This debt influences so many factors of our life—the house we live in, what we spend our money on, and the vacations we take. We’re nearly two years into his time as an attending but are still “living like residents” as we prioritize paying off these student loans. But that's not all we're prioritizing.
How We Decided on the Right 529 Plan
Our experience makes us want to be sure we can support our children’s educational goals. Even before they were born, we began this planning process. Brandon and I divide our financial responsibilities—he does the long-term stuff while I manage the day-to-day—so he did the research to select a 529 plan for our two boys. We live in Michigan, which has a pretty good 529 plan: the Michigan Education Savings Program (MESP). In fact, WCI previously gave a top rating to the Michigan 529 plan, and over the past 10 years, the MESP has consistently received gold and silver ratings from Morningstar in recognition of its asset-allocation approach, appropriate oversight, and low fees.
Both of our boys are still quite young, so their funds are invested in an aggressive growth account comprised of:
- TIAA-CREF Equity Index Fund: 48%
- TIAA-CREF International Equity Index Fund: 20%
- TIAA-CREF Emerging Markets Equity Index Fund: 4%
- Vanguard Real Estate Index Fund: 8%
- Vanguard Total Bond Market Index Fund: 14%
- Vanguard High-Yield Corporate Fund: 2%
- Schwab US TIPS ETF™: 4%
The total annual asset-based fees for the various investment options offered by the MESP range from 0.065% to 0.185% The aggressive investment allocation program that our money is invested in has a rate of 0.105%.
Loosely, we’re aiming to pay for most or all of their undergraduate schooling. We hope they’ll earn some scholarships, and we will perhaps ask them to contribute to the costs in some other way. We’ll probably be able to cash-flow some of the expenses, too, so we’re not necessarily trying to have enough money in there for all four years of college in advance. In fact, we haven’t set an exact goal quite yet. Our priority is paying off our own student loans; we’re only sending a few hundred dollars a year to their 529 plans at this point, so we’re certainly not at risk of overfunding.
Recently, we have been thinking about how the current economy and bear market play into our saving strategy. Should we be contributing more to our sons’ 529 accounts to buy these investments “on sale?” Our formal financial plan dictates that we will prioritize saving for our retirement, maximizing any available pre-tax benefits, and paying off our student loans before doing anything else. After we have fulfilled those goals, we will begin more aggressively funding the kids’ 529s along with saving for our next home. Our financial plan prevents us from being tempted to try timing the market to maximize the funds in our boys’ college savings accounts. We know our priorities and feel confident with our strategy. (Brandon and I have our semi-annual financial meeting coming up soon during which we’ll review our investment accounts and net worth and will assess our progress toward our goals. I’ll report back if anything changes!)
Most recently, instead of purchasing a gift for our 2-year-old birthday boy, we sent $200 to his college savings plan. We still celebrated by inviting family and a few friends over for a birthday dinner, and he had a blast. Our sweet little boy has all of the things he needs and much of what he wants (or more accurately, given his age, what we want for him). Rather than getting him another toy to play with, supporting his future goals just seems like a much more meaningful gift.
I hope that we are raising our boys to understand the privileges and opportunities that money can provide. In this case, a college savings account will enable them to pursue a field of their choosing and to start their professional careers without any debt. As they get older, I’d like to imagine that our sons will appreciate the gift of a contribution to their 529s.
Key phrase there: “I’d like to imagine.” In reality, we probably have a few more years before both of our boys understand enough about birthdays to expect presents. Once that happens, I don’t think we’ll be getting away with a 529 contribution in lieu of a gift anymore. At that point, hopefully we’ll have a little more flexibility in our budget and we can just match the cost of their birthday present with a bonus deposit into their college savings fund.
Should We Ask Extended Family to Contribute to a 529?
It’s absolutely our responsibility to fund our kids’ future education, but we’d love for our extended family to contribute to our kids’ 529 plans instead of giving birthday and holiday gifts. As the person currently sorting through all of our toys, I can say with complete confidence that the boys have plenty of things to play with. I haven’t figured out how to make a 529 contribution seem like a cool gift, though. When family and friends have requested gift lists, I’ve included the suggestion of a college savings contribution along with ideas for toys and activities.
It feels a little like a cash grab to only offer the 529 option, though. Our kids are little, and it’s fun to watch them open up a new toy. Aunts and uncles and grandparents want to get them something to play with. I get it. I got us all tickets earlier this year to a Thomas the Train extravaganza earlier just to see my 2-year-old’s face when a real, live Thomas train rolled up for him to ride on. Will he remember it? Probably not. Worth it? Absolutely.
On the other hand, is a 529 contribution an exciting gift? Eh, not really. Worth giving, anyway? Absolutely.
As Brandon and I work hard to knock down our own student loan debt, the impact of a 529 contribution gift is clear to us. A fully-funded college savings plan will allow our boys to begin their adult lives without the student debt burden we have now. My own extended family helped me throughout my education and I remember and appreciate their support. As a college student, I traveled to and studied in Costa Rica, Nepal, and throughout parts of Europe—something I couldn't have done without this financial help. I want this for my kids.
Beyond the financial advantage of having college completely paid for, I want my boys to know that not only do mom and dad believe in their dreams, but Grandma and Papi, Nanna, and their aunts and uncles do, too.
Student loans and the many programs and options are challenging to navigate. If you need help, check out StudentLoanAdvice.com, a WCI company.
Have you contributed to a 529 plan while also paying down your own student loan debt? How did you manage? Or is it a better idea to finish off your debt and max out your retirement accounts before you worry about a 529? Comment below!
Good post; however you’re seriously underfunding the 529s if your goal as you say is to mostly fund college. Just calculate it on any number of sites (like savingforcollege.com) and you’ll see (presuming your quote about contributing “a few hundred a year.” Private colleges are now over 80k a year and will be higher when your kids go; public less of course. And don’t count on any financial aid. Obviously will be easier when your loans are paid off; but figure ballpark $1000 per month per kid, at least.
I think 1000 per month per child is overkill. However a couple hundred a year is certainly not enough. My wife and I are both attendings and we contribute 8k a year per child and have 2 children. Gross contributions will be 200k per child not factoring in the investment return. We are saving to fund a minimum of 4 years of school. However they will be strongly encouraged to go to In state public schools or go somewhere on scholarship. My wife and I received wonderful educations and tuition was free at our public universities. Our in state medical school was also very affordable and between our own 529 plans and rural physician scholarships we were able to both graduate debt free.
She seems acutely aware that a few hundred a year is not enough. In the very next paragraph she says “Our formal financial plan dictates that we will prioritize saving for our retirement, maximizing any available pre-tax benefits, and paying off our student loans before doing anything else. After we have fulfilled those goals, we will begin more aggressively funding the kids’ 529s along with saving for our next home.” It doesn’t matter how much they are contributing now if they make up for it later.
Exactly! We’re definitely not funding them nearly enough, but there’s not much to be done about it now. The only way to increase our contributions would be to decrease our payments to my husband’s med school loans–and we want those gone asap.
$80K a year for college. Hard to imagine while living in Utah where tuition is $4-10K. I mean, Yale is only $60K. What college is worth $20K a year more than Yale?
Yale is 84,525 a year now – that’s tuition + room/board etc; it’s right on their website. Again, to each his/her own; there are indeed students who’d prefer not to go to college in Utah, and instead go to a smaller private college for reasons you’d not find valid for your family.
Yes, you’re right. I thought you said tuition earlier but you did not.
If we paid $84.5K for four years, we’d expect an MD or a DDS at the end of it!
Great article, thank you. I had a related thought/question to Scope. You mention a goal to cover most of undergrad, but have you talked more specifics? Is it to cover 4 years at Michigan State? 2 years at community college? 4 years at NYU? 4 years at NYU plus private med school?
My question is in part a selfish one that I’m trying to answer for myself… We have historically contributed aggressively to our kids’ 529s and at this point we’re wondering when to stop and send that money to taxable brokerage instead. We’re still not sure, but thinking something like a goal of 200k per kid (by the time they graduate). You want an expensive private school, kid? Fine this will come pretty close to covering full freight. Oh you want to go to med school? Maybe choose cheaper undergrad and you’ll have something leftover. Oh this was too much for your goals? A problem I will be delighted to tackle when the time comes.
All of the options valid, and of course totally individualized based on one’s philosophy. My wife and I both went to private colleges, hers free since her dad was a professor there. We feel (some) private, smaller colleges (say less than 10k students) offer things and interactions that large state schools don’t. Varies tremendously, I get it. But we told our kids we’d fully fund any college, as long as it’s commensurate with their abilities, public or private. We did. All through 529’s and the last 20 years of a bull market.
I don’t have $200K for any of my kids and it appears I have oversaved already for college based on where the oldest is attending and where the second oldest is talking about attending.
That’s a tough one. We haven’t necessarily set a dollar amount or decided what type of school we’d like to cover. My husband feels strongly about our kids paying for at least some of their college education. Interestingly, his own parents contributed a good deal to his undergraduate degree, and what they didn’t cover was funded by student loans. He feels that having the kids “pay their way” will help ensure they take things seriously. My undergrad and master’s degrees were paid for through a combination of my own cash contributions, academic scholarships, and student loans. I worked hard for the scholarships, but I wouldn’t say that having to fund the gap between scholarships/loans and the overall bill made me any more committed to my learning–it mostly just made me stressed about getting a job and earning money!
For those familiar with the NY 529, do you recommend just picking one of the overall funds (aggressive, moderate or conservative), OR picking individual funds like large cap growth, large capvalue, mid cap, etc.
My daughter is now 5 yo
Thanks
That’s more about you than the options. Do you prefer to roll your own or have a one-stop shop?
I think some folks make a mistake by leaving it in the all-in-one fund indefinitely. When clients come to me with a 529, I like to move it into individual component funds by no later than their teenage years. The reason — if we’re in a bad bear market and money is needed, I’d rather sell the bond funds and let the stock funds hopefully recover in a few years. With the overall target fund, you’re forced to sell both stock and bond which isn’t always optimal.
This same concept applies to people with Target Retirement funds in their 401(k), 403(b), etc. BTW, I am a big fan of the New York 529 as well. Great funds, low fees, wonderful customer service.
Good tips. Added complexity though for that benefit. It’s fine if you have an advisor to manage it of course.
Our state offered a nice benefit for 529 contributions in the form of a 20% tax credit on up to the first $5000 in 529contributions, ie up to a $1000 per year credit. We chose to maximize this benefit by contributing exactly 5k per year, even when we still had student loans to pay. If we hadn’t had that incentive, I don’t think we would have been as aggressive about funding the 529’s early on.
I’m a big fan of automation to meet my goals, so I set up a direct deposit to contribute to the 529 from each paycheck. It’s nice for me to just have it happen automatically. I’m with the OP that it makes sense to invest your own financial success first; when you’re financially strong it’s much easier to help your kids/family/charities. And in the long run it probably doesn’t matter whether you’re paying off loans or building a 529, you’re building financial momentum and moving in the same direction no matter the vehicle.
One idea I’ve been considering is telling each of our kids (when they’re older) that we plan to fund X% of their college expenses (where X is in the 75-90% range, I haven’t decided). This would be even if we have enough saved in our 529s to pay the full amount (plus extra could go towards grad school, or gifted to another family member).
My reasoning is to give them extra incentives (“skin in the game”) to apply for scholarships, consider a school’s value among other criteria, and gain financial understanding/appreciation with a (hopefully) small and manageable loan burden.
Anyone else who has done or will do something similar? Any unintended flaws in this plan?
Interesting idea and approach. I’ve also heard of
parents giving kids a budget, eg “we will support $20k per year for school”. That fits with a lot of families who don’t necessarily plan to pay $84.5k/yr for a name brand diploma. And maybe there are some benefits to teaching your kids about budgeting. A hyper expensive college education is a luxury and I don’t think it’s healthy to teach your kids that they are “entitled” to luxury goods and services without any responsibility or regards to the cost.
If the goal is to amplify incentives for scholarships, you could offer to match a % of any scholarships your child earns.
Some downsides of subsidizing a fixed % of tuition: 1. It will be harder to plan your expenses than if you set a budget. Are you covering 80% of a 20k diploma or 80% of a 200k diploma?
2. You might end up encouraging them to go to a more expensive school by dropping their marginal cost of attendance, eg that expensive out of state school might only cost junior an extra $45k compared to mom’s $135k subsidy. If they earned 40k in scholarships they might even feel like it doesn’t cost them anything to take the luxe option.
My families approach is to overfund our kids 529 plan. Reason being is I look at it as legacy planning. If my kids don’t use all the funds, then it can be re-assigned. With proper planning it might even be a tool to pay for private elementary or high school.