LOOKING FOR A GREAT GIFT? If you have friends or relations with young children, consider starting or contributing to a 529 College Savings Plan. It’s a great way to fund a future education and, let’s face it, really young children often enjoy the box and wrapping more than the gift.
So, if you want to give a child something they’ll always remember, starting a college fund may fit the bill. It’s a gift that may also benefit the parents. The College Board reported the average cost of tuition, fees, room, and board for in-state students attending a public four-year university is expected to be about $20,000 for the 2016-17 school year. At that rate, the average cost for four years of college would be about $80,000. Since two-thirds of students received financial aid during the 2014-15 school year, the following example estimates out-of-pocket college costs at $60,000.
Consider the cost of each option for this fictional family:
• Borrowing to pay for college: The Smiths borrow $60,000 to pay for 18-year-old Joe Smith’s college tuition. The interest owed is 5 percent per year. Over the next 10 years, they repay the principal, plus about $16,400 in interest. By the time Joe is 28, and the loan is repaid, his undergraduate degree will have cost about $76,400.
• Saving to pay for college: Alternatively, the Smiths could open a 529 Plan account for Joe Smith when he was born. If his family contributed $2,100 a year to the account and earned 5 percent each year, at age 18, Joe would have about $62,000 for college. His family would have contributed about $37,800 and earnings in the account would have contributed about $24,200.
The difference in the amount this fictional family would spend on college is about $38,600.
529 plans offer other advantages, too. Any earnings plan accounts grow federally tax-free, and distributions are tax-free as long as the money is used for qualified college expenses. Many states offer tax deductions or tax credits for 529 plan contributions, as well. This is, unfortunately, not the case in my home state of California, but you should definitely see if it is in yours.
Any adult can open a 529 plan and fund it on behalf of a child. Once the account has been established, parents, grandparents, relatives, and friends can contribute. If you would like to learn more, contact your financial professional.
Weekly Focus – Think About It
“Every great dream begins with a dreamer. Always remember, you have within you the strength, the patience, and the passion to reach for the stars to change the world.”
–Harriet Tubman, Civil rights activist