It’s easy to shut out the noise about rising tuition costs when your kids are still trying to navigate the early years of grade school. But ignoring the conversation altogether does a disservice to you further down the road.
In the US, the average tuition cost at state colleges is $9,970 for state residents, and $25,620 for everyone else. Private non-profit colleges carry a heftier tab at $34,740, according to student support organization College Board.
But the price tag comes with a benefit. Research from organizations like the OECD and the National Bureau of Economic Research, has shown that people with a post-secondary education often out-earn, and outperform peers without some form of post-secondary education.
For many parents the question is not if you should save for your child’s education but how?
The 529 Savings Plan
I often point to the 529 Savings Plan as a vital tool for many parents looking to save for their kid’s education. Introduced in 1996, 529 plans are state savings programs that are not taxed federally when used for “qualified education expenses” which also includes computers and, as of 2017, up to $10,000 towards K-12 tuition.
Contribution for 529 plans vary from state to state but can run as high as $380,000. However, I always try to remind clients that each individual in the US can give away up to $14,000 annually ($28,000 for married couples) without facing a gift tax. 529 plans have a special rule allowing you to contribute up to five years’ worth of gifts ($140,000 per married couple) at once.
What state can I invest in?
Given that each 529 plan is tied to a state, it can be confusing deciding which one to invest in. It’s worth pointing out that you can invest in any state 529 plan, your child doesn’t need to go to school in that state and it doesn’t have to be your own state. However, the majority of states offer a state income tax deduction or credit for residents who contribute to their own state’s plans. With that being said, different state 529 plans perform differently, which is why we work together to set up a plan that meets your educational saving strategy.
Other things to think about
Most 529 plans offer several investment options. You’re often allowed to change your investment twice per calendar year and rollover your funds to another 529 plan once per 12-month period. In addition to a general college savings plan, there’s also a prepaid option where you can purchase credits or units at certain colleges or universities at discounted prices. Fees and expenses associated with the different 529 plans are certainly something you should consider as well.
The good news is, you don’t have to navigate the world of 529 plans on your own. Let’s discuss your education savings options and how to achieve the goals that will help support your child’s future.