4 Reasons to Get a 529 for Your Kids
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.
Fast Forward to 2030
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.
What’s a Parent to Do?
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.
Enter the 529 Plan
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:
- You’ll enjoy substantial tax benefits: although you can’t deduct them on your income tax return, the contributions to your 529 account are not subject to federal income tax, and in most cases, not subject to state taxes, as long as they’re used by your child (“the beneficiary”) for covered educational expenses. Covered expenses include tuition, room and board and miscellaneous expenses such as books and fees. Qualified expenses were recently expanded to cover the purchase of computers, printers and Internet access. Because college expenses can be substantial, the tax benefit represents a significant savings.
- You decide how the money in your account is spent: custodial accounts, such as those established by the Uniform Transfer to Minors Act, require parents to gift their money to a trust and appoint a custodian who then makes decisions about the money in the account. The 529 plan keeps control squarely in your hands. No one else, such as a custodian or even your child, can make decisions about when or how much money is withdrawn, or for what purpose, without your permission. This level of control ensures that your money is spent when and how you want.
- The plan is easy and convenient to maintain: there are many 529 plans from which to choose. Compare the features of each before selecting the one which best suits your needs. Once you’ve made your choice, the process is simple and easy. You’ll complete a straightforward enrollment form and decide how much you want to contribute. You can even make contributions through automatic deposits. There are no restrictions regarding your age or income, and you can make significant contributions, up to $300,000 in most states. The simplicity of the 529 plan is one of its major benefits.
- You can change your plan as many times as you want: if your circumstances change, you can move the money in your account to a different plan or option. You can make these changes once a year and as often as you want. You can even change the beneficiary if necessary. The fact that you can amend your initial decision means the 529 plan will adapt to your changing needs.
The Best 529 Plans
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. Learn more about Upromise here.
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. Learn more about TD Ameritrade’s 529 plan here.
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. 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.