College Cost Calculator

The Mathematics of Tuition Inflation

Over the last 40 years, the cost of a college education has increased at nearly double the rate of standard economic inflation. While standard inflation generally hovers around 2% to 3%, college tuition has historically grown at roughly 5% per year.

Because of the laws of compounding interest, a 5% inflation rate means that the cost of college will double every 14 years. If you have a toddler today, and a local state school currently costs $25,000 per year ($100,000 for four years), you can expect that same exact degree to cost over $200,000 by the time they enroll.

The 529 College Savings Plan

To help combat this crisis, the government created the 529 Plan. A 529 is a tax-advantaged investment account specifically designed for education. It works very similarly to a Roth IRA, but for school instead of retirement:

• Tax-Free Growth: You invest post-tax money today. The money is then invested in the stock market (often in target-date funds). As the investments grow, you pay zero taxes on the capital gains or dividends.
• Tax-Free Withdrawals: As long as the money is spent on "Qualified Education Expenses" (tuition, room and board, books, computers), the withdrawals are 100% tax-free.

What if my child doesn't go to college?

This is the most common fear parents have about 529 plans. If you withdraw the money for non-educational purposes, the IRS will hit you with income taxes and a 10% penalty on the earnings (not the principal).

However, the SECURE Act 2.0 recently introduced a massive new benefit: The 529-to-Roth IRA Rollover. Starting in 2024, if you have unused money sitting in a 529 account that has been open for at least 15 years, you can roll up to $35,000 of it directly into your child's Roth IRA, tax-free and penalty-free. This essentially guarantees that even if they skip college, you have given them a massive head start on their retirement.