Common wisdom tells us many things. Among those things: children are expensive, particularly if those children are college-bound.
But the stakes are even higher than the initial impact on a family’s savings. Without that college degree, a child stands to earn a salary far less than that of his or her college-educated peers. The National Center for Education Statistics notes, “In 2011, the median of earnings for young adults with a bachelor’s degree was $45,000, while the median was $22,900 for those without a high school diploma or its equivalent, $30,000 for those with a high school diploma or its equivalent, and $37,000 for those with an associate’s degree.”
So as the average cost of college tuition continues to rise (at a rate of 4.5 percent at private universities and 8.3 percent at public colleges), common wisdom tells us one more thing: you need a plan if you intend on sending your child to college without breaking the bank.
But parents needn’t go it alone; students should join in the financial-planning process to ensure his or her college options meet their educational needs without blowing their savings. Together, parents and students can estimate their potential contributions using the abundance of college cost calculators available online. (Savingforcollege.com offers the “World’s Simplest College Calculator,” among other useful college-savings research tools.)
Then, with the help of a financial professional, establish a savings goal. Financial advisors, armed with the latest relevant rates of return, can help you identify what savings plan is right for your goals.
|James A. Warner,
A 529 Plan is a savings plan designed for specific higher-education-related costs — from tuition and student-activity fees to books and equipment — set aside for a designated beneficiary. (Warner urges investors to double-check planned 529 expenditures with a financial advisor, because while many expenses are 529-approved by the IRS, not all school-related costs can be offset with those funds.)
What’s more flexible is where 529 funds can be used, which is at most any accredited post-secondary educational institution, from culinary school to the Ivy Leagues. The beneficiary can be any member of the investor’s family — including bundles of joy who have yet to arrive in the world — or even oneself.
Bottom line: you are literally investing in your own or your child’s education. Just a little foresight will ensure not only more flexibility in selecting a college, but it will enable your child to start his or her career without the burden of loans and debt.
|Elizabeth McLaughlin of
TIAA-CREF Tuition Financing
As Elizabeth McLaughlin, a program marketing manager at TIAA-CREF Tuition Financing, Inc., explains, “Just as a Roth IRA is for retirement savings, a 529 college savings plan is for college savings. The term ‘529’ refers to Section 529 of the Internal Revenue Code. All 529 college savings plans are sponsored by a state, and nearly all states have one.”
And while each state has its own plan, an investor’s residency doesn’t always limit his or her 529 options.
McLaughlin explains, “You do not have to be a resident of a particular state to invest in that state’s plan. However, there may be tax advantages available only to state residents who invest in their home-state plan.”
Beyond an investor’s options at the state level, it is also important to know the benefits and limitations of 529 options.
According to McLaughlin, “There are several types of 529 Plans, including state-sponsored college savings plans and state sponsored prepaid plans. The main difference is that with a college savings plan, you contribute to an individual investment account to pay for a child’s future education. With a prepaid tuition plan, you prepay all or part of a child’s future tuition by investing in units or contracts in today’s dollars, to pay for future college costs.
“One important point is that with a savings plan, the funds can be used at any accredited institution nationwide, and some schools abroad,” McLaughlin adds. “With the prepaid plan, the funds must be used in-state.”
“When families come to our firm with a new addition to their family, we usually ensure two things: that there’s enough life insurance and that they have a 529 plan set up,” Warner says.
Naturally, an early start on college savings yields significantly more growth over time.
“If families take advantage of regular investing, for example, adding to their 529 from work payroll deduction or from their bank account each month, the account has the opportunity to grow over 18-plus years,” McLaughlin explains.
A 529 Plan even can outline just how aggressively to invest, depending on the beneficiary’s age. McLaughlin cites an “age-based” investment option that invests more aggressively in equities when the child is young, and automatically adjusts to invest more conservatively as the child ages and gets closer to college-age.
So is it ever too late to start a 529 Plan? Not at all. While the amount in a high-schooler’s 529 account might be less than the funds in an account started when a child in Kindergarten, those funds still can offset school-related expenses in, say, a student’s fourth year of school. And should your student opt off the college-bound path, 529 funds may be transferred to another family member.
But, there’s more than one way to save for college; some with more restrictions than a 529 Plan but not without tax benefits, depending on a family’s income. Among them, McLaughlin cites custodial accounts, “which are essentially a brokerage account so the parent can invest in a variety of options” she says, and Coverdell Education Savings Accounts, which allow an investor to save up to $2,000 per year per beneficiary, tax free.
The key is to work through your financials and goals with a certified professional to determine which savings plan is the right one for your family.
“There are multiple options for saving for college, and you can’t really recommend one for everybody because every investor is unique,” Warner notes. “But the 529 typically offers the best benefits based on the existing options that are available to the general public, but you should definitely check first with your financial advisor.”