Jean Chatzky
What comes to mind when you think of college? Long nights spent in the library trying to study for an exam, Friday night football games, sub-par cafeteria food? Check. Check. And check. But you may also be thinking: How am I going to pay for this? With college tuition inflation rates still far outpacing the average rate of inflation, the cost of attending college is higher than ever in the U.S. — and it’s continuing to climb. The annual cost of one year at a public university if you’re in state is $25,290, and $40,940 if you’re out of state, while the cost of a private university is $50,900. That includes tuition, fees, room and board, books and supplies and transportation according to LendEDU.
As we’ve noted before, one of the best ways to plan to pay for — and then pay for — college is with a state-sponsored college saving, aka a 529 plan. Unlike other savings options, 529s allow you (and others) to deposit significant sums for education, sometimes netting a tax deduction on your state-tax return for making the contribution and enjoying tax-free growth along the way. But there are a few things to keep in mind if you want to make the most of them.
Automate for the best results
The sooner you start to save for any goal, the more you’re likely to accumulate along the way — particularly if you automate your contributions so that you don’t have to make a good decision every time you want to make them. “Treat it like a retirement account,” says Brian Boswell, President of 529 Expert. As for getting that early start, the longer you keep your money invested, the longer it has to grow.
Make the most of the tax — and other — benefits
If you as a beneficiary take money out of your 529 plan and use it for college-related expenses, those earnings are exempt from federal income tax and in a lot of cases, state income tax says Deborah Fox, CEO and founder of Fox College Funding. If you are a contributor, depending on what state your 529 plan is sponsored in, you may be able to deduct your all or part of the contributions you make each year on your your state income taxes. Boswell says it’s important to look not just at state tax benefits, but any additional benefits that your home state might offer to its residents. “For example, Maine no longer offers a tax deduction to residents, but it does offer several different grants to residents that contribute to the NextGen 529 Plan, and North Dakota offers several different grants depending on the income level of their residents,” says Boswell. There are many programs like these throughout the country, so it’s important not to dismiss the in-state plan, even if there’s no state tax benefit.
Keep tabs on the risk you’re taking
Many people already understand the importance of shifting the risk in your retirement investments over time. As you get closer to needing the money, you want to take a less aggressive stance — so that if the markets take a downturn right before you stop working, for example, or in the early years of your retirement, you minimize the impact on your lifestyle. The same logic is true of any goal, including college. As you close in on college, you want to reduce the risk you’re taking. Many 529s have age-based portfolios that make this easy. Where my own kids were concerned, I invested their assets aggressively through elementary school, then shifted to the moderate option for middle school and finally into the conservative portfolio for high school and beyond.
Avoid penalties
Keep in mind that 529 funds are for qualified higher education expenses only. These include things like tuition, fees, room and board, books and equipment, but not health insurance or transportation to and from college. There’s a 10% penalty for withdrawals on earnings that don’t go toward qualified education expenses — so tread carefully.
With Hattie Burgher
Chris O'Shea
