Common wisdom tells us many things. Among those things:
children are expensive, particularly if those children are college-bound.
Lest common wisdom strike too obvious a chord, consider two
facts that better illustrate the point: Between
the school years 2000-01 and 2010-11, inflation-adjusted prices for
undergraduate tuition and housing at public institutions rose 42 percent; prices at private nonprofit schools rose 31
percent, according to the U.S. Department of Education’s National Center
for Education Statistics.
But the stakes are even higher than the initial impact on a
family’s savings. Without that college degree, a child stands to earn a salary
far less than that of his or her college-educated peers. The National Center for
Education Statistics notes, “In
2011, the median of earnings for young adults with a bachelor’s degree was
$45,000, while the median was $22,900 for those without a high school diploma
or its equivalent, $30,000 for those with a high school diploma or its
equivalent, and $37,000 for those with an associate’s degree.”
So as the average cost of college tuition continues to rise
(at a rate of 4.5 percent at private universities and 8.3 percent at public
colleges), common wisdom tells us one more thing: you need a plan if you intend
on sending your child to college without breaking the bank.
But parents needn’t go it alone; students should join in the
financial-planning process to ensure his or her college options meet their
educational needs without blowing their savings. Together, parents and students
can estimate their potential contributions using the abundance of college cost
calculators available online. (Savingforcollege.com offers the “World’s
Simplest College Calculator,” among other useful college-savings research
Then, with the help of a financial professional, establish a
savings goal. Financial advisors, armed with the latest relevant rates of
return, can help you identify what savings plan is right for your goals.
The 411 on 529
Warner, an LPL investment advisor representative at The Warner Group in Shelton,
Connecticut, notes, “Some situations will call for different solutions, but
generally, the 529 plan is the most accepted way of saving for higher education
|James A. Warner, |
A 529 Plan is a savings plan designed for specific
higher-education-related costs — from tuition and student-activity fees to
books and equipment — set aside for a designated beneficiary. (Warner urges
investors to double-check planned 529 expenditures with a financial advisor,
because while many expenses are 529-approved by the IRS, not all school-related
costs can be offset with those funds.)
What’s more flexible is where 529 funds can be used, which
is at most any accredited post-secondary educational institution, from culinary
school to the Ivy Leagues. The beneficiary can be any member of the investor’s
family — including bundles of joy who have yet to arrive in the world — or even
Bottom line: you are literally investing in your own or your
child’s education. Just a little foresight will ensure not only more
flexibility in selecting a college, but it will enable your child to start his
or her career without the burden of loans and debt.
|Elizabeth McLaughlin of |
TIAA-CREF Tuition Financing
As Elizabeth McLaughlin,
a program marketing manager at
TIAA-CREF Tuition Financing, Inc.,
explains, “Just as a Roth IRA is for retirement savings, a 529 college savings
plan is for college savings. The term ‘529’ refers to Section 529 of the
Internal Revenue Code. All 529 college savings plans are sponsored by a state,
and nearly all states have one.”
And while each state has its own plan, an investor’s
residency doesn’t always limit his or her 529 options.
McLaughlin explains, “You do not have to be a resident of a
particular state to invest in that state’s plan. However, there may be tax
advantages available only to state residents who invest in their home-state
Beyond an investor’s options at the state level, it is also
important to know the benefits and limitations of 529 options.
According to McLaughlin, “There are several types of 529
Plans, including state-sponsored college savings plans and state sponsored
prepaid plans. The main difference is that with a college savings plan, you
contribute to an individual investment account to pay for a child’s future
education. With a prepaid tuition plan, you prepay all or part of a child’s
future tuition by investing in units or contracts in today’s dollars, to pay
for future college costs.
“One important point is that with a savings plan, the funds
can be used at any accredited institution nationwide, and some schools abroad,”
McLaughlin adds. “With the prepaid plan, the funds must be used in-state.”
Time is Money – When to Set-Up a 529 Plan
Ideally, once your child has a Social Security number,
parents should set up his or her 529 Plan, complete with an automatic contribution
“When families come to our firm with a new addition to their
family, we usually ensure two things: that there’s enough life insurance and
that they have a 529 plan set up,” Warner says.
Naturally, an early start on college savings yields
significantly more growth over time.
“If families take advantage of regular investing, for
example, adding to their 529 from work payroll deduction or from their bank
account each month, the account has the opportunity to grow over 18-plus
years,” McLaughlin explains.
A 529 Plan even can outline just how aggressively to invest,
depending on the beneficiary’s age. McLaughlin cites an “age-based” investment
option that invests more aggressively in equities when the child is young, and
automatically adjusts to invest more conservatively as the child ages and gets
closer to college-age.
So is it ever too late to start a 529 Plan? Not at all.
While the amount in a high-schooler’s 529 account might be less than the funds
in an account started when a child in Kindergarten, those funds still can
offset school-related expenses in, say, a student’s fourth year of school. And
should your student opt off the college-bound path, 529 funds may be
transferred to another family member.
But, there’s more than one way to save for college; some
with more restrictions than a 529 Plan but not without tax benefits, depending
on a family’s income. Among them, McLaughlin cites custodial accounts, “which
are essentially a brokerage account so the parent can invest in a variety of
options” she says, and Coverdell Education Savings Accounts, which allow an
investor to save up to $2,000 per year per beneficiary, tax free.
The key is to work through your financials and goals with a
certified professional to determine which savings plan is the right one for
“There are multiple options for saving for college, and you
can’t really recommend one for everybody because every investor is unique,”
Warner notes. “But the 529 typically offers the best benefits based on the
existing options that are available to the general public, but you should
definitely check first with your financial advisor.”