Parents are often concerned about how to afford the high costs of college these days. You – and your kids – have choices on what to do. One is starting a College 529 Plan.
Today – May 29, or 5/29 – is National 529 College Savings Day. Since graduation events are everywhere you turn, it’s a perfect time to think about the skyrocketing costs of a college education – and how to pay for it. Because high school finishes more quickly than you think it will. And, the earlier you start saving for the next step, the more time your investment has to grow.
But before you get carried away on saving to pay full college expenses for each kid, consider that 1) a four-year college degree isn’t the only answer to acquiring particular job skills, and 2) students who have their own “skin in the game” are often more appreciative of the value of their degree.
That said, your family might consider the advantages of starting an education savings plan, or a College 529 Plan. Unfortunately, a majority of Americans don’t even know what a 529 plan does.
What Is a College 529 Plan?
The College 529 Plan was originally created to help parents (and grandparents) save for children’s college education, and it’s been around for several years. An adult opens an account, names a beneficiary, and makes contributions. Some states provide tax benefits for contributions to College 529 Plans. Essentially this account is like the storage shed for these specific contributions, where you can save and invest in a variety of choices that can grow tax-free until withdrawn for the named beneficiary.
You didn’t know that’s what a 529 Plan did? You aren’t alone.
Less than 30% of Americans consider a 529 Plan a way to save for education expenses, according to a recent study by Edward Jones, a financial services company. Phone surveys with more than 1,000 adults revealed that many incorrectly thought 529 Plans were a form of life insurance, retirement savings plans or low-cost health plans.
Those who don’t understand the 529 Plan are not likely to be using one. Indeed, only 13% of those surveyed listed a 529 Plan as a savings strategy. Instead, 43% of those surveyed said they used (or plan to use) personal savings to pay for higher education expenses, while 33% said scholarships, 31% said federal or state financial aid, and 20% said private student loans.
Most Aren’t Saving for College
But on average, only about 50% of those surveyed said they were saving for college on an annual basis anyway. Sadly that means some parents will forego saving for their own retirement in order to pay college expenses for their kids, but that’s not a great solution.
More to Know About 529 Plans
If a 529 Plan is a strategy you want to consider, find out more about how this investment works first. For example, two types of 529 Plans exist, and every state and the District of Columbia do have at least one type. Understand choices and benefits for your state, and the specifics about how your contributions will be invested under the plan.
In addition, many 529 Plans now have expanded to include use for qualified tuition expenses for grades K-12 as well as for college, thanks to the 2017 Tax Cuts and Jobs Act. To learn more, check the SEC’s Introduction to 529 Plans for investors.