Should you start a 529 college savings plan for your child? Well, there are a lot of things to consider when making that decision once you have some money to put it in. The 529 college saving plan is one of the best ways to save for college. You can contribute into a specified account and your money will grow tax free to pay for future education. You can contribute as much as 300K (depending on the state). It’s important to try to keep it simple. When choosing the best one for you, you should start with two main issues.
Tax Deduction
States have their own 529 plans and have different perks for investors. In looking at the 529 in your home state, does it have a tax deduction for opening in-state? If yes, then it's a strong PLUS for your home state's plan. If not, you may consider looking at the perks in other states. Another important note to make is that if you are likely to move to another state during your children's lives before college, you would not be able to get the tax benefits if you're not a resident.
Costs and Investment Options
Low costs and a good array of investment options is important to review. If you are not going to receive tax deductions, check the most highly rates options. Also note, it's not just about looking at the lowest cost plan, but also about the investment selections.
Here is a link from Forbes about the best 529 plans as of 2021. https://www.forbes.com/.../personal-finance/best-529-plans/
Due to the skyrocketing college costs, it’s harder than ever to fully prepare for the entire college price tag, but a 529 plan can help. When calculating how much you should be putting away for your children’s college, the difficulty as a parent is that you also must think of your own retirement that you can’t get a loan for. Because of that fact, most financial planners and advisors would recommend saving for your own retirement BEFORE any college savings. I know for those parents who always put their own needs on the back burner as compared to your children, but this is crucial. If you’re struggling, you can’t help your children. You know the saying, “Put on your own mask before assisting others.” That also applies here.
As a parent, it is not your responsibility to pay for 100% of your children’s college expenses. There are numerous sources where money can come from.
Children Should be Contributing to Their Own Fund
Yep, I said it. Have those kids have some skin in the game. From the moment my children began working, a portion of their paycheck went to college savings. Having them understand the true costs of post high school graduation will not only be enlightening for them, but also might curb their personal spending habits when it’s coming from some of their own money. Before they start working, take a portion of their allowance, monetary gifts for Christmas/Birthdays, or any other income source (car wash/lemonade stand) and put it into their college fund as well. You don’t have to wait until children are actually working before having them help. Don’t worry if the amount is small, but you just get them in the habit of saving and promote you all working together toward the same goal. At the end of the year, break out those piggy banks and deposit all of the amounts that kids have accumulated over the year. *There may be a minimum deposit ($25 for my personal plans) so parents may need to help round up if necessary.
Family Members Can Help
If you have children, you know that over the years, you accumulate so much stuff for birthdays and holidays. Instead of receiving so many actual items from family, ask them to contribute to their 529 plans. Some grandparents may choose to still give the normal gifts, but also contribute to the plan if you let them know the importance of this action. The great thing is that family can contribute directly to the plan and are not required to go through the parents. They can decide to make lump sum payments or even monthly amounts. Just let them know that anything is appreciated.
Apply for Scholarships
Some states have specific scholarships that can be used if you decide to stay in the state for college. Even if you don’t have this option in your state, there are many scholarships that are available for students. https://bigfuture.collegeboard.org/pay-for-college/scholarship-directory?gclid=Cj0KCQjw1aOpBhCOARIsACXYv-fN3kLAgQ1d3DhjlwPsQyxHYoiJ8D3cmHXs661mKZxe237V6v3hutcaAj6LEALw_wcB&ef_id=Cj0KCQjw1aOpBhCOARIsACXYv-fN3kLAgQ1d3DhjlwPsQyxHYoiJ8D3cmHXs661mKZxe237V6v3hutcaAj6LEALw_wcB:G:s&s_kwcid=AL!4330!3!651224034933!e!!g!!scholarships%20available%20near%20me!16168321082!128350914850
Student Loans
The student loan crisis and the high costs of college is probably the reason that you’re thinking of starting a 529 plan. As parents, most of us would like to be able to pay for our children’s college, or at least a large percentage of it. Unfortunately, that’s not always possible. Students do have access to unsubsidized college loans automatically. The current maximum amount that students are offered are $5,500 as a freshman, $6,500 as a sophomore, and $7,500 as a junior/senior for a total of $27,000 over four years. Even though the loans are not required to be paid back until six months after graduation, the interest begins accruing immediately upon procurement. What does that mean? That means if you borrow $5,500 for the first year, by the end of the year, you owe more than you borrowed, and it will continue for four more years until the payments begin. What’s even worse is that it is compounded DAILY. So, if you’re borrowing $2,271 (1/2 of $5,500 minus fees) and you have an interest rate of 2.75% (current federal loan APR), you pay .0075%/day. So, on day one, you pay 17.03 cents in interest. However, on day two, your interest is calculated on the new amount of $2,271.17 and on day three, you are charged 17.12 cents bringing your balance to $2,271.34. It may seem that it’s not growing very much but think about that compounding over 4 1/2 years. It’s all working against you. If your student (or you) can keep up with paying the interest (perhaps monthly), then your student will actually come out owing the amount they borrowed versus a much higher amount. *Interest had been deferred beginning September 2020 due to Covid but resumed September 2023.
Unlike unsubsidized loans, subsidized loans have a financial need component. The other benefit is that subsidized loans do not start accumulating interest until six months after being at least a part time student. To determine the amounts and types of subsidized loans, students must first complete and submit the FAFSA (Free Application for Federal Student Aid) which can be found at https://studentaid.gov/h/apply-for-aid/fafsa
How much do you really need to save in your 529 plan? Let’s take a look at some harsh facts. Per www.educationdata.org, The average annual cost of tuition at a public 4-year college is 23 times higher than tuition in 1963. College tuition inflation averaged 12% annually from 2010 to 2022. The cost of tuition at public 4-year institutions increased 9.24% from 2010 to 2022. After adjusting for currency inflation, college tuition has increased 747.8% since 1963. The most extreme decade for tuition inflation was the 1980s, when tuition prices increased by 52%.
How much you need to save is a hard answer to determine when there are so many variables. A lot may depend on where you live or where your student wants to go to school. Find your state and the average costs. https://educationdata.org/average-cost-of-college-by-state
Some questions you first need to answer are:
· What percentage of the cost do you want to fund with the plan?
· What college is most likely to be attended? State college, community college, 4-year university, private college?
· I expect to get a 6% increase annually.
The low end would be cheaper collegiate expenses, likely including community college where the high end would be private institutions and even graduate studies. Don’t forget that college expenses are more than just tuition. There is housing, food, books, campus fees, athletic, bus, and other items.
If you want more specific estimates on deposits and calculations, www.thecollegeinvestor recommends going to https://thecollegeinvestor.com/529-plan-guide/ .
Even though investing in 529 plans may be a complex and somewhat confusing subject, it’s crucial that you do your due diligence and learn about all (or most) of the ins and outs while children are still young. That will allow you to be more prepared and not so shocked by the sticker price of college.
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