College costs are already significant and quickly growing, and many parents are worried about how to afford to get their children through school. With tuition inflation, it is estimated that it will cost around 54,000 dollars for one year of school in the next 18 years, and that is for public education. It makes sense that parents are worried about college costs and looking for ways to start saving while their children are small.
There are many ways to save money for college, like putting money in a savings account or a CD; however, the best college savings plan for most people is to invest in a 529 plan. Named after the section of the IRS tax code where they were created, 529 plans are similar to IRA’s but focused on colleges and universities.
Similar to IRA’s, college saving plans are tax-free while you are growing them. They differ from IRA’s because contributions usually can’t be deducted from federal taxes; however, 529 plans are state-sponsored, many states do offer tax deductions for contributions. When the beneficiary is ready to attend college, if the money is spent on qualified higher educations costs, like tuition, fees, or room and board, the money is not taxed.
Here is everything you need to get started with your research of school savings plans, including information about the two different 529 plans and other options that may be best for your family.
Types of 529’s
When you start your research, you will find that there are two types of 529 plans: college savings plans and prepaid tuition plans. The plan or plans that are available to you are dependent on the state where you live. Some states only offer one type of 529, while other states offer both. Here is more about both types of 529 plans.
College Savings Plans
College savings plans are available to help you invest money to pay for costs at all accredited colleges. When you set up an account, you choose from several different investment options, which are usually pre-made portfolios that are set up based on your child’s age. College savings plans are usually stock heavy when you start them, and they move toward bonds as your child gets older. Stocks are a little riskier while bonds are considered safer, so as your child ages, your money gets invested in the safer form.
One of the biggest benefits of a college savings plan is that even though they are state-sponsored, you can invest in any 529, from any state, even if you don’t live there, and even if your child is not planning to attend college in that state. There are many different 529 plans to choose from, and it’s important to research to figure out which one is right for you.
Prepaid Tuition Plans
The other type of 529 plan is the prepaid tuition plan. One of the biggest differences between the college savings plan and the prepaid tuition plan is that college savings plans can be used at any accredited college or university and prepaid tuition plans are college-specific. Prepaid tuition plans allow parents or other caregivers to pay for tuition credits now that can be used in the future. Private school savings plans, or in-state school savings plans are available at many educational institutions around the United States and in the District of Columbia.
Prepaid savings plans allow parents to pay for college without having to invest the money, and they are great for parents who feel somewhat sure about where their child will go to school, or at least which school their child will go to when they college. Depending on whether parents what investment flexibility or financial security will determine which 529 plan is best.
There are a few drawbacks to prepaid plans, including:
- If you decide to withdraw money from the account for non-college purposes, you may only get back the amount you paid, with none of the extra growth money.
- Some prepaid college plans charge high premiums to lock tuition costs in.
- Tuition rates have been rising more quickly than investment returns which have resulted in many of the prepaid plans having financial difficulties. Since 2014, ten states have closed some of their prepaid plans to new investors because of financial problems.
Best 529 Plans
While there are many different 529 plans and the best ones are going to be different for each family, depending on their specific needs, there are some 529 accounts that are known for being especially useful. Here are three of the best.
Scholarshare College Savings Plan
The Scholarshare college savings plan is sponsored by California and available at all accredited colleges and universities in the United States. According to its website, the Scholarshare college savings plan is significant because it is easy to get started and does not require any considerable investment upfront.
The plan is flexible, can be managed online or by mail, and can be set up for automatic deductions to make it an easy college savings plan for you. For people who want to get a plan started but don’t have a lot of money upfront, the Scholarshare plan can be initiated for 25 dollars and has a minimum investment of 15 dollars per pay period for automatic deposits.
Alaska’s T. Rowe Price College Savings Plan
The T. Rowe Price college savings plan is similar to other 529 plans but also offers state income tax deductions for the people in their state. Plans can be started by parents, grandparents, or any other adult who wants to invest in a child’s future. Withdrawing money is tax-free anytime, as long as the expenses are used to pay for qualified education fees at any private or public college, university, vocational school, or graduate school.
Louisiana’s START Saving Program
Louisiana’s START saving program is a qualified tuition 529 plan. It is innovative and designed to help families help their children. It is sponsored by Louisiana and administered by the Louisiana Office of Student Financial Assistance, and under the Louisiana Tuition Trust Authority (LATTA). It allows people to save money at their own pace, with any amounts they are able to afford. To help encourage people to save, the State of Louisiana matches some of the deposits made into accounts during the year, depending on the category the account has been classified.
While 529 plans are the most popular college fund savings programs, there are other savings options that some people choose.
Most people associate Roth IRA’s with retirement, but due to a quirk in federal law, people can withdraw their contributions to their retirement account, penalty-free, to cover college expenses. Some people prefer Roth IRA’s because of the flexibility, but one downfall is that retirement earnings are subject to income taxes. There are a couple of drawbacks to Roth IRA’s, including:
- If the beneficiary needs federal funding, like Pell grants, to pay for college, withdrawals from a Roth IRA may affect that because they are considered non-tax income.
- The amount you can save is limited because you are only able to save 5,000 dollars a year if you are under fifty, and 6,500 dollars per year if you are over fifty.
- There are income restrictions that can affect your ability to save with a Roth IRA.
U.S. Savings Bonds
One of the most flexible ways to save money for future educations is through savings bonds. If the proceeds of a U.S. savings bond are used for education, and if you earn under a certain amount of money, you can cash in savings bonds completely tax-free. Savings bonds are very secure, and you can withdraw penalty-free for any purpose.
The biggest downfall of U.S. savings bonds is that their interest rates are very low and do not keep up with the inflation of tuition.
School Fees Savings Plan
School fees savings plans offer a tax-efficient way to save with protection. School fees savings plans are flexible, and even though they are designed to cover college and university fees, the money can be used for other things if needed. There are three different types of plans.
- Capital schemes involve investing a specific sum into a fund that guarantees you will always at least get back the amount of your original investment. The capital schemes plan works best for people who invest as early as possible, preferably before the baby is born, for the best investment opportunity.
- Income or regular savings schemes are built with set payments every month or year.
- Combines schemes are set up for people who want to invest a significant fund amount at the beginning of the plan and then continue growing it with payments over a short term.
College savings plans are available to help parents, grandparents, or other family members save money to help their children cover the growing costs of higher education. There are many different options for saving money, and it is essential to research because there are options that can work for almost everyone.
Paying for college is becoming more difficult with the increases in tuition, but one way to help is to start saving as early as you possibly can. By utilizing a college saving plan, you can help make sure your children, grandchildren, or other family members, are taken care of for years to come.