529's are weird for us. We're not actually huge fans--I don't like the restrictions. However, DD17 has one (set up by the same generous grandmother and passed down from DD25). We have other stuff that we've mentally earmarked to cover college for our younger two. We do include that in our net worth, for now. It's just too complicated to know for sure how things will land (merit scholarships? State versus private? grad school? no college?). DH and I are figuring on $250k per kid, we're not getting any need-based aid. If they choose the pricey undergrad, don't expect us to pony up for grad school. But, this is highly personal--some parents are willing to pay whatever it takes, others won't pay a dime of college. It's amazing, if you read Bogleheads, how many very wealthy people won't pay for the children's college.
Anyway, 529's are fine for some people. I just don't like them.
I currently have 1 in college, and another is a HS junior who plans to go to college. We don't know where the younger will go, but it is unlikely to be a local (NY) state school. So we have a pretty good idea what our costs are going to be, as out of state prices for state schools are generally only a bit less than private, so we're likely to pay in the upper range for both (D1 is at UMich which is in the
very slightly below top tier private school cost range). But, 10 years ago, we had no idea, and we basically, like you, budgeted about $250k per kid, figuring if they come in for less then that's just found money to use elsewhere. But remember the $250k is an upwards moving target. I think, on average, it already is higher, unless they stay in state or go to a private school that offer non-need-based aid (there are more than you might think).
As for 529s, I think the comments here, yours and others, have identified the biggest weakness, which is the limitation. If your child(ren) don't go to a full price 4-year program, you either take out the money for other purposes with a penalty, or have to transfer it to someone else who can use it. That said, it has worked very well for us and I suggest people consider taking advantage, in part if not in whole. I also acknowledge my situation was probably on the extreme end of getting good value. Let me start by listing the reasons it was particularly useful for us.
- We live in NYC. Our combined state and city marginal tax rate has been roughly 10% for my entire adult life.
- NY state offers married couples a tax deduction for the first $10k of 529 plan contributions (individuals get $5k I believe). So by depositing at least $10k every year for the past 20 years or so we have received an instant ~$1k reduction on our state and local income taxes. I view it as I would 10% back on credit card spending. I'm not going to pass it up. It has cost us $9k of our own funds to save $10k for college every year.
- We make enough to fully fund all other tax advantaged savings plans available to us, plus put at least $10k in the NY 529, so we never had to prioritize 401k against IRA against HSA against 529.
- We were always pretty certain our daughters would both go to college and would probably not attend NY state schools. But this was never certain. It's still not certain for D2, as close as she is. But we figured it was a risk worth taking, and looks like it will probably pay off.
Even if none or most of these do not apply to you, 529 plans offer complete tax free growth and income (interest, dividends and capital gains) both for the period of saving and at withdrawal, as long as the withdrawal is for a qualified educational use. A few years ago they started allowing certain qualified withdrawals for pre-college level education, though I do not know those rules. If there's a chance your children might go to say a private HS (and this year has caused a lot of parents to reconsider the certainty of public schools), it's worth looking in to. Finally, though I have not done so, my understanding is it is pretty easy to transfer accounts from one beneficiary to another without penalty. This can be sibling to sibling, or to the next generation (or to a cousin or whatever).
So, if you have 2-3 kids, you can do all sorts of things, like fund enough in a 529 for one full price college run, and if the first child does not use it in whole or part, spread it around. This hedges your bets while giving you options, and unless none of your children attend any college whatsoever, you probably use up what is in the 529. A lot depends on you, your kids, do you live in a state with great state schools, etc. In the end, we had enough in D1's fund to pay for about 70% of her college career, and will use general funds to finish her out. D2 is on the same track, though once we know where she is going, and if it is not unexpectedly low cost, I will probably at that point transfer a chunk from general funds to her 529 to top her off in order to get the last few years of tax free growth and income and target having enough in the 529 to eventually pay 90%-100% of her costs.
It also helped that the NY plan is very much low cost, using Vanguard funds and charging low admin fees on top of that. I have a pretty low regard for NYC and NYS government, but they really did 529s the right way.
https://www.savingforcollege.com/article/finding-the-lowest-cost-529-savings-plans
Anyway, that's my analysis. Check your state rules, and consider even other state plans - some like NY allow OOS investors but some do not.
What a truly terrible year to be a child - so many things missed that we'll never get back.
