Everybody knows that their children’s college tuition is going to have to be paid somehow by someone someday.
Starting to save for college seems like a daunting task to many parents of young children. First, the fact that it is so far into the future makes them feel seem like there is plenty of time left to start (hint: there isn’t). Second – and by far the most impactful – is the uncertainty of how much college is actually going to cost once your child starts their quest for higher education.
Higher education costs at both 2- and 4-year colleges and universities have been rising steadily over the last decade. These 10-year higher education inflation numbers vary by state. For example, Louisiana has had to deal with the worst inflation rate at 106.9% while Ohio’s comes in at a much smaller 5.2%.
In fact, nationwide in 2017 the average cost for one year of education at a 4-year college in the United States is $9,725. By 2027 that figure is expected to be almost $12,500.
Parents of college-bound children are going to have to help pay for these rising costs that include tuition, fees and living expenses. Many families are putting their hope into federal grants like the Pell Grant, but those granted dollars have not been growing at the same inflation rate as the base cost to send your child to college.
Fortunately, there are many options available to those looking to save for that futuristic degree. These options include savings bonds, using the stock market and the lesser-known 529 plans. A recent 2018 study by Edward Jones found that only 29% of Americans were even aware that 529 savings plans existed.
What Is A 529 Plan?
529 Plans grow in a tax-free environment (i.e. you do not pay taxes on any growth), and generally have a 3-5% rate of return. The only caveat is that all money inside a 529 plan needs to be used for higher education, and if not… there are usually penalties around 10% imposed on the interest gained after the money is withdrawn for non-education related uses.
Starting a 529 account now is always the best option, no matter how old you (or your child) is. While playing the stock market may potentially yield higher returns on your initial investment, placing your money into a 529 plan is usually the safest option to pay for higher education. This is because while a 529 account grows in a tax-free environment, many states also allow parents to apply immediate tax deductions on the money put into these accounts. One study even found that when the all the various tax benefits were taken into consideration, 529 plans outperformed their benchmarks in every category.
How Do You Setup A 529 Plan?
Every US state except Wyoming has their own state sanctioned 529 plan available to their constituents. Usually with an initial contribution of less than $100, you can begin saving for your child’s education in any of these state-managed 529 plans. In addition to these plans, many financial companies such as Charles Schwab, Vanguard and TIAA-CREF have their own versions of a 529 account. The only difference between the two types are where the fees are paid. Overall, they are similar enough to just pick one you are comfortable with and start saving immediately.