With the start of school we are one year closer to writing that dreaded college tuition check. And the next one, and the next one….With college costs increasing faster than the rate of inflation, by the time my Kindergartner starts college, tuition at a public university will be approximately $140,o00 and at my beloved Stanford University it will be a whopping $420,000. Yikes!
At this revelation, many parents just give up and assume they will be in major debt to pay for college. And I guess that is an approach. But let me encourage you to consider an alternative solution that will, at a minimum, reduce the amount of debt you have to take on and, at a maximum, avoid debt all together.
A 529 COLLEGE SAVINGS PLAN.
I know, I know, this isn’t a new concept anymore, but it certainly bears repeating now and again. 529 college savings plans are THE best way to save for college. Financial aid consultants will argue that having money in a 529 will reduce your chances at qualifying for financial aid, but I just have never understood that argument. Would you really rather take your chances at getting enough financial aid from the government? Financial aid isn’t FREE by the way – it comes in the form of student loans, ie. debt that has to be paid off. I don’t know about you but I would much rather control the amount I can contribute for college than cross my fingers the year before it starts and hope I qualify for some debt….
So, why a 529 plan specifically? One of the best advantages is the ability to save that money tax-free. If you use what you’ve accumulated for post-secondary education, not only does it grow tax-free but you get to take it out tax-free. Which means you never pay taxes on the gains. Any other way you save for college requires paying taxes on the gains, thus reducing the amount you have for tuition.
Afraid to take any market risk these days? Okay, who isn’t? Well, in some plans that are now offered, there is a CD feature that eliminates 99% of the risk. And the miniscule interest you earn on the CD is tax-free. Most plans also have Money Market Funds that allow you to park tuition cash and earn a little bit of interest. These may be excellent choices if you are a year or less away from writing that check.
Another feature I really like about 529 plans, in addition to their tax-free status, is their flexibility. All the plans available have high maximums, designed to allow you to save the full amount for college tuition. Unlike your IRA or Roth or even the old Coverdell Savings Accounts, you are not limited to contributing $2,000-$6,000 per year by the IRS. We all know THAT will never get you past the first semester.
Many people think that you have to invest in your own state’s 529 plan to be eligible for the tax-free status. Not true. You can invest in whatever state 529 plan suits your needs. Some states will offer a deduction for contributions to their own plans, but all growth is tax-free whichever plan you use.
And anyone can contribute to your child’s 529 plan! So give the grandparents a few deposit slips. It’s a great estate-planning feature for them.
I could go on and on about the features & benefits, but I won’t. They are all covered at www.savingforcollege.com, which is the best website out there for understanding 529 plans, alternatives to 529 plans, financial aid consequences and which plans are best.
Still not convinced about the value of 529’s over financial aid? Visit www.nasfaa.org for everything you need to know about financial aid, so that you make an informed choice.
Let me know how you plan to save for college –