Tuesday, May 15, 2007

529s get even better!

Congress recently added new advantages to the popular 529 investment plan for college savings. The savings vehicle can now accumulate interest and be drawn tax free. This is a great advantage to parents who are saving for the children's college expenses because they will not have to pay taxes on the account as it grows. Another benefit? A child can still qualify for financial aid (grants, scholarships, etc) because it is not included in their total assets. All students must submit a FAFSA that lists their assets and, in most cases as dependents, their parents assets to determine what kind of financial aid they qualify for. Once again, the 529 comes out ahead as the ideal college fund.

If you don't already know what a 529 is, you should definitely read up on them.

Why save for your children's college? I find it incredulous that some parents do not believe in saving for their kids college education. College is no longer optional, and the cost continues to rise. It is absolutely impossible for a student to work their way through college anymore. As is the case now, and will be more so in the future, the basic tuition will be more than any part-time high school graduate could possibly make.

That leaves 3 options: Scholarships, grants, and loans.

Scholarships are the ideal solution to paying for college, but here's the rub. Not all kids are going to qualify, and just because you can't get a scholarship doesn't mean you won't do well in college.

Grants are great for low income families and they can sometimes pay a very large portion of tuition. I myself used grants during college.

Loans are the worst possible way to finance college, yet everyone seems to take them for granted. You not only pay far more for your education over the long term, but you put a young adult fresh into the business world already in a mountain of debt. Graduate students, borrowing money all through college, will likely have a monthly loan payment higher than their parent's mortgage. Face it, college isn't a guarantee at a job, and everyone starts at the bottom. Despite recent polls of students whose expectations are far too high, most college grads won't be making six figures out the door. Yet that $1,000 a month loan payment is still going to be coming in the mail whether your kid is making $30,000 a year or $100,000.

If you are ready to start, you can open up a 529 online at sites such as Vanguard.com.


Jim said...

Saving for college can be too easily put on the back burner. My wife and I know that it is important to save for college just because of our own experiences. Our parents did not save for us for college nor did they pay for it. I saved as much as I could but my wife on the other hand did not. Should it be the parents responsibility to pay for their child to go to college though?

My parents told me college was my choice, and I saw great things with the computer so off I went. The money I saved for years went very quickly. At the same time I also had grants and scholarships to help me with most of the cost of tuition, but then I took on federal student loans to cover the rest. I tried to avoid loans as much as possible, resorted to credit cards to cover school expenses (BAD idea), but could not stay out of the fire. Now that I'm out of school, have a good job, I have a handful of debt to get paid off. My wife has borrowed about four times as much to cover her undergrad and her graduate degree programs. When she is done with her masters, she will go into teaching.

The both of us have a bunch of student loan debt to pay. Mine will be gone much quicker because I saved early and borrowed less. I'm in full support of the 529 plan so that I could save money early and allow it to grow and eventually help our kids pay for college one day. College will be necessary in the future but I don't think parents should drive themselves into debt in order to keep their children debt free. I also think that if they take on a student loan, it puts them on the line to pay that loan back after they graduate.

Beyond the Consumer said...

Jim, thanks for the comment! I completely agree that parents should not go into debt for college tuition. Nor do I believe kids should have to go into debt for it either. With a little smart planning, neither has to happen.

Estimated current costs of tuition yearly for a 4 year university is $4,089 according to finaid.com. Estimating a conservative 7% inflation rate for a newborn heading to college at age 17, the total projected cost would be $57,348 for a public in-state university.

Socking away money with a conservative 6% return, we would reach this balance by contributing $160 monthly. That pays tuition, room, board...free and clear.

While that may seem high, a family can easily put away less and make up the difference with any scholarships and grants. With the tax free earnings we get with the 529, there's no excuse not to put something away.