It’s no secret that education costs have increased in recent years. According to the U.S. Department of Education over 40 million Americans owe an average $30,000 in student debt. But did you know bachelor’s degree recipients earn roughly $1 million more than high school graduates over a lifetime? While education may be expensive, it plays a large role in earning potential over time.
With costs on the rise, it’s no longer enough to simply put away money in a standard savings account when saving for college. If you plan to put a child through school someday, you’ll want to make sure you can afford it. A great way to do this is with a 529 plan.
What is a traditional 529 plan?
A traditional 529 plan is an account that covers the costs of education including room and board, tuition, fees, technology and books. These plans use an investing component to offer a return on contributions. You can choose a plan based on your risk tolerance and when you’ll need the funds.
The plan owner is typically the parent. The owner is responsible for selecting a beneficiary, and can change that beneficiary at any time. This comes in handy if your child decides to forego college for an alternative career path. You can ensure the money is used for education by changing the beneficiary.
Anyone can open a 529 plan, but the more time you have before the funds are need, the better. As with any investment, regular and consistent contributions over time are the keys to success.
Benefits of using a 529 plan
Tax advantages offered by 529 plans make them a great tool for building an education fund. The plan owner, as well as the beneficiary, won’t have to pay taxes on the account earnings as long as they are used for qualified education expenses.
All 50 states offer variations of the traditional 529 plan. In some cases, you may be able to enroll in a plan offered by a neighboring state.
If a plan owner’s income falls below a certain threshold, they may be eligible for additional benefits. Some employers offer matching contributions and bonus contributions to encourage families to save more for education.
What’s a prepaid 529 plan?
A prepaid 529 plan is another option for parents planning further ahead for education. A prepaid plan locks in the price of tuition at an in-state, public university as it is today. So if you’re sure your child will attend that school, you can have tuition paid for in advance.
Since a prepaid plan is locking in a lower tuition rate, there’s no need for funds to be widely exposed to the stock market for growth purposes. You decrease your exposure to risk by taking the cost of college at the time you start saving versus what it will cost in the future.
If a beneficiary decides to go to school elsewhere, they may not get the most out of the plan. They’ll be able to use the funds in full, but it may not cover costs at another university. These plans aren’t offered by all states, so it’s important to research options based on where a beneficiary plans to go to school.
Maximize your return
Regardless of which plan you choose, don’t underestimate the time it takes for your money to grow. If you can, combine regular contributions with lump sum contributions from time to time. Some savers even contribute to traditional 529 plans and prepaid plans to maximize coverage of college costs.
Education allows students to become professionals and achieve a higher quality of life. Give that gift to your child by opening an account to fund their future and ultimately, their success.