It’s that time of year when students across the country are graduating from college. It took a lot of effort to earn those degrees, but it took something else, too - money. It’s this financial aspect of college that may concern you if you have children. How can you take some of the stress out of paying the high costs of higher education?
To begin with, it pays to be informed about what college actually does cost. Consider these figures from the College Board’s 2007-2008 Trends in College Pricing: The average total expense (including tuition, fees, room and board) is $13,589 per year for in-state students attending four-year public colleges and universities; for students attending four-year private colleges and universities, the average total cost per year is $32,307. And over the past several years, college costs have been rising faster than the general inflation rate, so you can expect to pay considerably more in the future.
How can you cope with these costs? You could tap into your Roth IRA or take a loan from your 401(k). But do you really want to potentially lower the resources you’ll have available for retirement? Alternatively, do you want your children to start their working lives saddled with heavy student loans? (The average student loan debt is $21,000, according to the Project on Student Debt.)
The best way to avoid either of these scenarios is to start saving for your children’s college education when they are young - and to use a savings vehicle specifically designed for college funding.
One such vehicle is a Section 529 savings plan. With this plan, you put money in a specific pool of investments. Contribution limits are high - more than $300,000 per beneficiary in many state plans, although special gifting provisions may apply. Plus, Section 529 savings plans provide you with a degree of flexibility, in that you can change your plan’s beneficiary to another family member. This can prove quite useful if you have one child who decides against college while another one wants to go. Furthermore, all withdrawals are free from federal income taxes, as long as the money is used for a qualified college or graduate school expense of your child or grandchild. However, Section 529 withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes. (Also, distributions will appear as income on the child’s tax return, which could affect financial aid calculations.)
Not all Section 529 savings plans are alike; some have high fees and limited investment options. Because it’s not always easy to compare the benefits of different plans, you may want to get some help from your financial advisor. As a (very) general rule, though, you may want to start by looking at your home state’s plan, which might come with a tax deduction or a matching contribution, up to a certain dollar amount. And even if you sign up for your home state’s plan, your child doesn’t have to stay in state for college; you can apply the money to virtually any accredited school.
By starting to save early, and by taking advantage of an appropriate college savings vehicle, such as a Section 529 plan, you can prepare to make that Graduation Day of the future a happy one for everyone concerned.