When planning for the cost of college for your children, often parents and grandparents think of the 529 plan due to the tax benefits. Almost ten years ago the 2006 Pension Protection Act made the tax treatment of 529 plan college savings instruments permanent. This will be familiar ground for most, but perhaps parents of future college students need to a refresher.
It will always be cheaper to save for college than to pay for loans. If you’re in the position of most folks – with enough assets that you figure your child won’t be considered for financial aid – then it pays in spades to save now. If you saved $150 a month into a 529 plan for 10 years at 4% rate of return, you’d have just over $22,000 saved up. If, on the other hand, you didn’t save that money and had to borrow $22,000, paying it back over the same 10 year period at 6% interest would require monthly payments of $245 – $95 dollars a month more. If you got lucky and the rate on the loan was the same 4%, the payments would still be $224 a month, almost 50% more than the amount you could have been saving.
The best time to start is yesterday, so the best thing to do is don’t delay. If you started putting money into a 529 plan when your child was first born, accumulating $22,000 by the time the child is 18 only requires $70 per month, assuming 4% rate of return. Wait just five years (until the child is 5), that payment increases to $108 per month. Wait until your child is 13, when you have only five years left in order to accumulate $22,000, you’d need to make 529 plan contributions of more than $333 each month.
Choose the right plan. The differences between your choices for a 529 plan alone are mind-boggling. You can choose a 529 plan that is specific to your state, or one of a myriad of other choices. You can choose a pre-paid tuition plan, or a savings 529 plan (my choice is always the savings type of 529 plan). In addition you need to consider other options for savings as well, such as a Roth IRA. Some options may provide tax benefits, others may not, but this is a critical choice to make as you make your savings plan work for you.
Sterling Raskie, MSFS, CFP®, ChFC®
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