Sending your children to college is expensive. According to the College Board, the average cost of one year of college in 2017 at a two-year community college was $7,560, $14,210 for in-state public colleges, and $26,100 for private non-profit colleges.
And, to make matters worse, the College Boards’ calculations are AFTER financial aid. These were the out of pocket costs to parents and students for one year of tuition, room, board, and books.
The cost of a college education continues to rise each year too. In fact, the rising cost of college is outpacing inflation and is growing faster than most other purchases we make. The rising cost of college is double the standard inflation rate.
So, what can you do about the rising cost of college? How do you plan to pay for college? A 529 College Savings Plan can be a great investment to help you and your family plan ahead for the day your kids go off to school. These plans also have a few unique benefits that make them a great way to save for college.
How 529 College Savings Plans Work
Congress created 529 College Savings Plans in 1996, and they are very similar to Roth IRAs. Like a Roth IRA, parents can invest in mutual funds with after-tax dollars. Then, parents and students can use earnings from the investment tax-free as long as they use them for qualified education expenses such as tuition, room, board, fees, books, and the like. If you use the money for something other than education, you have to pay penalties and taxes on the earnings from the investment.
Typically, each state has it’s own 529 College Savings Plan that they, or investment companies on the state’s behalf, administer for investors. Parents are free to choose the 529 College Savings Plan of any state, but you often receive a tax deduction on state taxes if you choose the plan in the state where you reside. So, a 529 College Savings Plan can also help you save on your state income taxes as well.
Each state typically offers several options for parents to invest – usually in four or five mutual funds. These funds are based on an investor’s risk tolerance and many states balance the funds available or rebalance the holdings based on the child’s expected freshman year of college.
For example, I invest in the Georgia 529 College Savings Plan, which the state calls the Path2College 529 Plan, for my children. Every state seems to have unique names for their plans to help them with marketing. The Georgia plan offers several investing options that range from TIAA-CREF nine managed exchange traded funds (ETFs) that mirror boarder stock market and bond indices to a real estate investment trust (REIT and emerging market fund. The investment choices really run a wide gamut of options.
As you get closer to sending your kids off to school, the risk profile of the holdings become more conservative to preserve capital and hedge against market volatility as you get ready to use the money for college expenses.