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I’ve talked a lot about soaring costs for many of our biggest needs and wants — energy, health care, food, and more.
But if you have kids or grandkids, you’re probably aware of another major expenditure that keeps going up no matter how weak the broad economy is: The price of a college education.
The College Board’s latest survey came out a couple weeks ago, showing that tuition and fees at private 4-year schools rose 4.4 percent in the current school year to $26,273.
Meanwhile, the price of a 4-year public university education spiked more than 6 percent for both in-state and out-of-state students ($7,020 and $18,548, respectively).
Lest you think this is a short-term trend, I’ve got some more numbers to share from The National Association of Independent Colleges and Universities, which surveys 350 private, nonprofit colleges and universities:
The group says the average increase in tuition was 4.3 percent in 2009, and it notes that this is the smallest increase since the 1972-1973 school year.
Even worse, the NAICU notes that the average annual increase in tuition and fees has been 6 percent over the last ten years!
As I said on my blog, I really question whether many of our country’s students are even getting value for their money anymore.
Heck, would you rather go into business for yourself with a head start of anywhere from $30,000 to $100,000 or come out with a four-year degree and then dig your way out of a major financial hole?
That question gets harder and harder to answer.
Regardless, a lot of parents and grandparents — myself included — still want to provide the choice.
And given soaring costs, I think the best way to save for college is clearly the ubiquitous 529 Plan.
529 Plans Not Only Help College Savers
They Can Also Help You Avoid Taxes!
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| A Cap and gown is the least of your college expense worries these days! |
A 529 plan is a tax-advantaged savings plan designed to help you save for a child’s future college costs. They are issued by individual states, either directly or through brokers. And since they were added to the Internal Revenue Code in 1996 they’ve become an extremely popular choice.
Essentially, there are two types of 529 plans — prepaid tuition plans and college savings plans.
As their names suggest, prepaid plans lock in today’s tuition prices at eligible public and private colleges and universities. Many of these plans are guaranteed or backed by the issuing state, and the owner or beneficiary typically has to reside in the state.
The way I see it, prepaid plans are great if you’re fairly certain that a beneficiary is going to attend a particular school (or if you’re going to choose for them!). They might also be good for “belts and suspenders” types who want a rock solid guarantee.
In contrast, regular 529 college savings plans are more like tax-deferred retirement accounts. They don’t lock-in college costs, but they allow you to sock away large amounts of money (some allow hundreds of thousands in contributions). Typically, you are then able to choose from a set menu of investments such as broad-based mutual funds.
Unlike a corporate retirement account, however, you can choose what plan you want to join.
Here Are Your Three Biggest Considerations
When Selecting a 529 Plan …
#1. Fees — It’s true of nearly any investment account: The fees you pay are going to greatly affect your portfolio’s performance. And despite recent crackdowns on egregious fees at some 529 plans, you can still find better and worse deals. A general rule to follow is that you will likely pay more in fees and charges when you purchase through most brokerages than you would with a similar plan purchased directly.
#2. Investment Options — As you probably know, the quality of mutual funds varies greatly. Not just because of the fees they charge, but also because of their management and focuses. In general, I favor low-cost index funds, especially in long-term accounts such as a 529. Please note that — based on recent tuition growth — you’ll need an annual return of AT LEAST 6 percent just to keep pace … and a few percentage points more if you want to gain any ground. That argues for a more aggressive asset allocation.
#3. Tax Treatment — All 529 plans are treated the same way for Federal tax purposes — no upfront deduction, but your investment earnings grow tax-deferred and withdrawals for qualified education expenses are tax-free.
However, each state has individual rules about how it treats your contributions. Many allow upfront deductions with generous limits, but you will often need to choose your home state’s plan. A few states allow deductions no matter what plan you contribute to. And some states don’t offer a tax break at all!
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| Take a look at your home state’s tax treatment of 529 plans before you do anything else! |
If you’re getting the idea that choosing the right 529 plan is a highly individual choice, you’re right.
But I suggest you get started by investigating your home state’s treatment of contributions and the plans it offers. Then, if you’re not going to get a tax break, look at other low-cost plans next.
Bottom Line: 529 Plans Give You
Powerful Savings and Flexibility
In the end, there’s very little we can do about soaring college costs other than:
- Using the best saving vehicles available to us and …
- Having a real heart-to-heart with our children and grandchildren about how the money is best spent.
And between A. and B., you’ll rest easier knowing that the money in the 529 plan always remains the property of the account owner and NOT the account beneficiary.
That means YOU remain in control of whether or not to release the funds for the intended recipient, regardless of age, college acceptance, etc.
Most plans will let you easily transfer the plan to cover another recipient (practically any family member).
Alternatively, you can withdraw the funds and use them for something else. You’d just need to pay income tax and a 10 percent penalty on any earnings that have accumulated.
So, in the end, if there’s even a small chance that someone in your family will attend college — and you want to pitch in some money — a 529 plan is a great way to get started.
Best wishes,
Nilus
P.S. In a recent Dividend Superstars issue, I also gave my subscribers a couple other very interesting ways to save for educational expenses. And that’s just one example of the kind of finance-boosting content I deliver each and every month. Why not try out my service? Heck, it’s only $69 for a full year!
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