Saving for College

What are you doing to save for your children’s college expenses? Just as with your own retirement the sooner you begin saving the better off you will be when it comes time to write that check for college tuition.  And in today’s environment where the cost of education is vastly outpacing inflation it is even more important to start early and use the best possible savings method.  Based on historic costs and the rate that the cost of higher education has advanced the cost of a four year education at a public school could be as high as about $225,000 for a child born today and the cost for a private education will most likely be even higher.

But there is an easy way for you to save for a child’s education and that is through a state sponsored 529 plan. While there are other types of savings plans I personally feel the 529 plans are the best for several reason.  A few of these reasons are in many states there are tax advantages for contributing to the state’s 529 plan, there are no income limitations on contributions for the 529 plans, beneficiaries can be changed if the one named does not need or go to college, and contributions are not limited to parents as friends and grandparents can make contributions.  In the case of grandparents they can give up to five times the annual gift limits at one time for grandchildren with no tax consequences but would then be barred from gifting to that child again for the full five years unless they are willing to pay the gift tax or use some of their lifetime gift exemption.

Also it is worth noting that it is doubtful that you would be required to save the full amount for college as with many students there are alternative ways to help fund the expense. Scholarships, work study, grants, and loans are some of the ways to bridge the gaps between what you do have saved and what the actual costs are.  Some financial planners think that parents should only try to save between a third and half of the expenses instead of the full amount.  And under no circumstance should you be saving for a child’s college at the expense of your own retirement.  Pay yourself first and fund your retirement accounts before you save for a child’s education.  The reason I say this is because you are the only one you can count on for your retirement where your child can work or take out loans to help pay for college as they will have longer to pay off the debt.  With some proper planning and work by all parties involved college can be paid for with little dire consequences on the family.

But not all state 529 plans are created equally. Some states have plans with lower fees than others.  Some states offer a wider range of investing options than others.  Some states will only offer tax breaks if you invest in that state’s plan while other states will give the tax breaks regardless of where the 529 plan is located.  Currently Washington state and Wyoming are the only two states that do not have 529 plans so if you live in one of those two states you will be forced to invest in another state’s plan.  Also you are only allowed to change a plans asset allocation once every twelve months so look at the plans to see which one will allow you to have the best freedom as it comes to reallocating your portfolio.  Most plans will be more aggressive when your child is younger and become more conservative as they approach college.  Also there are fees to consider when selecting a plan where state run plans are generally cheaper than plans operated on behalf of the state.  And the plan administrator can affect the fees as well as Vanguard funds are generally the cheapest as in general investing.

Do an Internet search to help you find the state plan that best works for you and your needs. Remember that not all states offer the same tax benefits so check with your state prior to going out of state for plans.  There are numerous things to consider when selecting a state’s plan and I have touched on a few of them and given you some food for thought.  If you have any questions feel free to contact me and I will do my best to help you figure out the best solution for your situation.

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