Hi friends! Today I wanted to provide an overview of a type of college savings account in hopes that it will help you better understand one of the most common ways people are saving for education. Hands down, a 529 account is the easiest way to just get started. First of all, if you haven’t checked the latest stats, the going rate for a four-year degree at a private college is $32,000 per year*. That translates to $126k for a four-year degree. I know. I have a two-year-old. It’s scare to think about what it’s going to be in 16 years.
Since the cost of education has only risen, it’s important to think about how you’re going to finance such a large expense early. One option is that you have your kid pay for it themselves. While this is totally viable (and they may get a lower interest rate on their loan) I’m not going to debate the pros/cons of funding education or having your child self-fund in this post. I may tackle that one later, but for now, if you’ve decided to do a little saving on your own and have heard about a 529, you’ve come to the right place.
What the heck is a 529?
A 529 is a tax-deferred college saving account that you can use to save for your children’s college education. You can start one even before your child is born, and the best way to maximize benefits is to begin saving as early as possible. A caveat to this is that you need a social security number on a 529 account. If your baby isn’t born yet, you obviously don’t have a social security number. The solution here is to open the account in your name and begin contributions. You then change the beneficiary to your baby once he or she is born.
Two of the great reasons to open a 529 are the tax benefits, and compounding growth. Pending your tax bracket, utilizing a 529 can save you almost 30% on your education alone! Additionally, you’re getting the benefit of the stock market and compounding growth on market gains over a long period of time as you save for college. Opening the account a few years earlier can mean BIG additional savings over the long term.
When to start saving
If the cost of a four-year degree wasn’t enough to scare you into starting early, this will be! By saving $250 per month from age 0-17, you’ll only have about $71k in the 529 when it’s time to go to college. With the cost of the average private college above, this funds just more than half of the total cost.
That was such a scary number when my husband and I first heard it. We’ll fund HALF of our daughter’s education if we contribute thousands of dollars per year. The only thing that seemed more absurd than the original figure was what it costs if we waited to start contributing.
I found this handy calculator online that helps estimate how much you should save monthly. You can put in your household income as well as your estimated payments and child’s age. Based on the calculator, if we wait to contribute until the child is 10, the cost DOUBLES to $500 per month. We then still only fund half of the total cost of college. For me, that’s enough said. Although it’s a huge financial investment, beginning early gives you options to decide how you’ll fund education in the long run.
If you want to try it out, check out the calculator here.
How do I get one?
Great! You’re sold on the need to start saving (early) for college. The good news is that you don’t need to be a financial genius or have a financial planner to open a 529. You can check out the plans offered by your state first, or you can open one in another state. Most states don’t have restrictions on where the plan is and where it can be used. For instance, you can live in Pennsylvania and use the Utah plan and send your child to school in Maryland. These states are just used as examples. You’ll definitely want to check the restrictions on each plan before you enroll. Google is a great place to start, and savingforcollege.com has a ton of great resources as well.
Why is this the best option?
I’m not a financial advisor, and I’m actually not going to claim that this is the “best option” to save for college. However, it is one of the most widely used. There are definitely other options.
Yes, you could put all those dollars directly into a savings account. Since most savings accounts don’t even grow at the rate of inflation, you’re losing money in the long run. You could also just play the odds and drop your money in the market. Then you’re missing out 18 years of tax benefits. You could also invest in real estate if you know what you’re doing. I don’t have a lot of experience in that area and I wanted to invest somewhere I felt a little more comfortable.
There are definitely multiple strategies and options for college saving. I can’t promise that a 529 account is the right thing for you or your family, but it is the most universal way to save for college. It is likely to be at least a part of your savings strategy.
So What’s the downside?
Of course, as with anything, there are always considerations to take into account before you start investing. One of the most important factors to consider is whether or not there is a possibility you’ll need the money for anything else. With a 529 you can’t get the money out without a penalty unless it’s for your child’s education. If you have variable income or don’t have emergency savings, it might be too risky to lock up a significant portion of your income.
Having a 529 with a balance of over $20,000 will be counted as part of the expected family contribution as parental income. Although this doesn’t exclude you from financial aid, it can change your eligibility. I’m not 100% clear on the nuances of this, and the tax benefits likely outweigh the possible aid reduction, but this is one of the biggest factors I wish I’d known when starting our 529. Here’s a good article to help you understand it a bit better. Although we likely won’t qualify for aid anyway due to our income, it would have been nice to know this technicality going in. No one has a guarantee of qualifying for financial aid, so the tax benefits and compounding on investment gains make it worth exploring this type of account.
There are definitely many things to consider as you begin saving for your child’s education. If you’re looking for a tax-deferred account that has the advantage of compounding interest, a 529 is a great choice. You can get one in any state. Opening an account is as easy as choosing a fund with the target high school graduation year. A 529 is a low-stress way to begin saving for college early.
Let me know if you have any other great tips for saving!
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