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College is expensive and getting more expensive every year. Annual tuition increases are significantly outpacing the rate of inflation and growth in wages. State and federal financial aid programs, such as Pell and Supplemental Education Opportunity Grants, are intended to make college affordable, but actually do little to defray costs.
The average cost of attendance at a public university was $15,100 last year, and the average cost at a private school was $32,900, according to the U.S. Department of Education. Rising higher education costs, coupled with minimal government aid, have forced millions of students and their families to take out increasingly larger loans to cover the gap between what colleges cost and what families can pay. As a result, for the first time in history, student loan debt now exceeds total credit card debt.
Those are the costs for students attending college last year, but what about children born last year whose first year of college will be in 2030? The average increase in public college tuition over the past 10 years has been 6.5 percent. Assuming that trend continues, the average cost to send your son or daughter to a public institution in 2030 will be more than $44,000, about three times what it is now and almost $200,000 over four years. The average annual cost for a private college education will be close to $100,000, or $400,000 for four years. Of course, some of those costs will be covered by financial aid, but even so, the amount parents will be expected to cough up is simply beyond the reach of most families.
Depending on whether your child chooses a public or private school, you would have to deposit between $11,000 and $22,000 every year for the next 18 years into a traditional savings account to cover the cost of a college education in 2030. Needless to say, this is far more disposable income than most families have, which leaves parents wondering if there is an alternative to traditional savings accounts.
Created by Congress in 1996, the 529 plan, operated by states and some educational institutions, makes it easier for parents to save for college by offering tax advantages and other incentives. If you’re concerned about paying for your child’s college education, here are four reasons you should consider a 529 plan:
Each 529 plan will differ depending on the bank or institution you sign up with. Here are our favorite 529 plans:
Upromise: This is the most popular 529 plan because it allows you to spend money on your everyday purchases while also saving for your child’s education. Upromise works much like a credit card, where you get cash back when you spend at certain stores. It even comes with a credit card that you can use in stories, or you can log in to the Upromise website and shop online. You get 5% cash back for shopping online and up to 8% cash back for eating out, in addition to cash back for buying groceries.
TD Ameritrade: Investment services also can offer great 529 savings plans. TD Ameritrade is among the best of those options. While you don’t get cash back for shopping, you can contribute up to $14,000 per year to your 529 savings plan, while enjoying some of the tax benefits from the plan.
Financing a college education is a significant challenge for most families, and that challenge increases every year, along with the rising costs of tuition, room and board. While student loan consolidation and student loan refinancing are valid options down the road, you and your student can get ahead of the issue by borrowing less in the first place.
If you’re concerned about costs and need innovative solutions to help you meet this financial challenge, consider getting a 529 plan. You’ll see substantial tax benefits and maintain control of your money through a flexible and easy-to-maintain savings plan.