There is no question that college costs have become an outrage. College costs increase at an average of 5% per year. This has resulted in a 4-year degree from a private institution averaging $134,600 and a 4-year degree from a public institution running $39,400. These costs only cover tuition and fees. Add in thousands for living costs each semester, and the average college education is reaching the point where years of loan payback are to be expected. That the degree could take years to pay for itself is another story entirely.
Saving for College: Cost-Saving Strategies
Even though we have no reason to expect a European, free college model any time soon, there are some clever ways to fund college. One unconventional approach is by working for Starbucks. This is not merely a recommendation to work while going to college; Starbucks has a joint venture with Arizona State’s online program where juniors and seniors working for the coffee company receive free tuition. But if you or your college-bound children aren’t interested in a first career as a barista, then some financial planning might be in order.
Saving on taxes while putting money away for an education can help cut the costs dramatically. Starting when your child is young is even better. To that end, a 529 plan can be one of the best things that can be done to start preparing for an eventual 4-year degree cost that is increasing yearly.
Saving for College: Section 529 Plans
529 plans are named after Section 529 of the Internal Revenue Code 26 U.S.C. There can be significant advantages to these plans such as state tax benefits, matching grants, exemption from financial aid calculations and protection from creditors. The regular 529 plan is based on a savings model that invests the funds into mutual funds as they are added to the plan. These plans typically incorporate more risk when your child is younger and then move to more conservative funds as s/he gets closer to college age. The states administer the savings plans but usually record keeping and administrative services are delegated to financial services companies.
The big benefit is that these plans are exempt from Federal income or capital gains taxes when withdrawn and used for college purposes.
Saving for Colleg: Pros and Cons of 529 Plans
A new form of 529 that is very attractive is a prepaid plan. Currently, ten states have this plan and are accepting new applicants; Florida, Illinois, Maryland, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington. The beauty of this plan is that tuition credits can be purchased at today’s rates to be used in the future. If you can do it, take this option for sure. The guarantee against a yearly 5% increase is so much more valuable than mutual fund investments that might not perform and have the associated management fees. Purchasing credits now for a toddler could save hundreds of thousands of dollars in the future.
529 plans are not subject to the gift tax of $14,000 per person. A couple filing jointly may contribute $28,000 per year. The plans must be used for college costs or are subject to future taxation. Any portion not used for college would be taxed accordingly. And if one of your children decides that college is not for them and that they wish to tour with their favorite band, the plans are transferable to other beneficiaries.
These plans can be one of the best ways to get ahead of the spiking college costs. Starting earlier can provide massive savings down the road regardless of how much you can afford to put away. Any amount makes a difference.
Jerry Mooney is the author of History Yoghurt and the Moon as well as The Power of Thought. He studied at the University of Munich and Lewis and Clark College where he received his BA in International Affairs and West European Studies. He received a UNESCO travel scholarship to East Germany where his thesis on economic transformation received honors. He has recently taught Language and Communications at a small, private college and owned various businesses, including an investment company that made him a millionaire before the age of 40. He writes prolifically about various subjects including money, tech, education, disruption theory and innovation. He can be found on Twitter@JerryMooney
What if you don’t have the time to save for college? If you need cash right now or if you’re struggling to pay off student loans, consider a student debt consolidation loan. These lenders specialize in providing low-interest loans to graduates.