College tuition is rising much faster than inflation, making saving for college serious business. At today’s prices, just about everybody needs a little financial help.
According to Sallie Mae's new "How America Saves for College 2015" report, 89 percent of parents expect their child to attend and benefit from college with 84 percent saying they're willing to stretch financially to make that college dream a reality.
Luckily, help is available. The main thing to keep in mind as you plan your child’s education is that, despite the rising costs, there are many options available to you that offer the flexibility and control you need to fit college savings into your overall financial plan.
Remember, Saving Is Always Better Than Borrowing
That may sound obvious, but consider this: Saving $200 a month for ten years at 7% interest would yield $34,818.89. Borrowing the same amount at the same interest rate with a 10-year term and no fees would require payments of $404.28 a month, according to calculations by Mark Kantrowitz, publisher of FinAid.org. Leaving aside inflation and other variables, the borrower ultimately pays twice as much as the saver.
Don’t Worry that Socking Away Money Will Count Against You
"You're better off saving the money," says Sandy Baum, a higher education economist with George Washington University. She says when it comes to the amount a college expects a family to pay for tuition, the parents' income level counts up to eight times more than an asset like themoney in a college savings plan. "If you save the money, even if it's considered as an asset, the amount that it would reduce your aid is minimal compared to the benefit you'll get from having saved that money," Baum says.
There’s a Reason 529 Plans* Are So Popular
“The 529 college savings plan in the financial world today is the best way to save for the expenses of college education,“ said Young Boozer, chairman of the College Savings Plans Network based in Lexington, Ky. “These plans have features that are extremely beneficial to the account opener as well as the student.”
Their primary benefit has to do with income taxes on the account’s earnings. As long as the money is used for qualified college expenses, such as tuition, books, and room and board, a 529 is a tax-free investment. According to Craig Parkin, managing director at TIAA-CREF Tuition Financing, "The gains on the accounts are tax-deferred, and once the funds are used to pay for qualified tuition expenses, parents will never pay taxes on those funds," he says.
The most popular plans operate much like a 401k retirement plan because contributions are invested in stocks, bonds or money market funds. Helpfully, some funds offer “aged-based” fund management that reduces market risk as your child gets closer to college age. Your funds are initially invested aggressively to maximize earnings and then automatically switched to more stable options as the child approaches college age. That way a stock market correction won’t empty your college fund at the worst-possible time
With all these benefits, it’s no wonder more families are socking away more money in 529 college savings plans than ever, investing a record $253 billion last year in preparation for the sky-high cost of higher education, according to a report from the College Savings Plans Network.
*Investment returns are not guaranteed. Investments in a 529 college savings plan are subject to risks, and you could lose money by investing in a 529 college savings plan. Participants assume all investment risks, including the potential for loss of principal, as well as responsibility for any federal and state tax consequences.
The information mentioned in this article is for informational purposes only, is intended to provide general guidance and does not constitute legal or tax advice. Each person’s situation is unique and may materially differ from the information provided herein. You should seek the advice of a financial professional, tax consultant and/or legal counsel to address your specific needs before any financial or other commitments regarding the issues related to your situation are made. Banco Popular North America does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content.