529 Plans 101: You Can Afford to Pay For College

by
Chair, College Savings Plans Network; Director, Washington's Guaranteed Education Tuition Program

The value of a college education is indisputable. Children with any amount saved for higher education are six to seven times more likely to attend a four-year institution than those without dedicated savings. However, the cost of college has gone up nearly 51% over the last 10 years, and continues to rise. Feeling overwhelmed? Never fear, the College Savings Plans Network (CSPN) is here to help you learn more about 529 college savings plans—an easy and convenient way to save for higher education.

529 plans are tax-advantaged investment plans designed to encourage saving for future higher education expenses. Withdrawals from 529 plans for qualified education expenses are free from federal income tax, and many states offer additional incentives and tax benefits. Anyone can open a 529 account for any beneficiary (the beneficiary is the person, usually a child, for whom you are saving).

Grandparents, relatives, or family friends can all be account owners or can contribute to an existing account. Saving does not have to break the bank—many plans allow monthly contributions as low as $15–$25. Looking for somewhere smart to invest your tax refund? Consider using it to contribute to a loved one’s 529. Interested in thinking outside the gift bag around birthday time? Put an extra contribution toward their 529. Getting children directly involved (contributing babysitting money, for example) is also a great way to emphasize the importance of saving for college from an early age.

As with any savings account, time is your best ally, and it’s best to start saving as soon as possible, so that your investment has plenty of time to grow. According to a recent CSPN survey, 31% of investors opened a 529 account when the beneficiary was age one or younger. Think of it this way: a family that begins setting aside $50 a month when their child is born can accrue over $21,000, in an account that earns 7% interest per year, by the time the child turns 18. As you can see, a little bit goes a long way to help eliminate future student loan debt.

With that said, it’s important to remember that it is never too late to start saving for a higher education; some savings is better than no savings. An account can be opened for an individual of any age at any time, and it can be put to use immediately. As with all investments, investors in 529 plans should look carefully for the investment option that best matches their risk tolerance, investment objective, and the age of the child. People looking to invest can compare the different state plans using CSPN’s plan comparison tool.

While higher education is without doubt expensive, the costs are, in general, quite worth it. According to the U.S. Census Bureau, college graduates earn an average of $1 million more over the course of their careers than those with only a high school degree. College is an investment for a lifetime, and the time to start saving is over before you know it. Start saving today for a child in your life, and let 2014 be the year you help a loved one finance the path to a bright future.

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