How to afford your children's college education is probably not top of mind right now. But life will return to normal and the need for a good education will still be something you have to deal with.
Being able to afford college is not a foregone conclusion — not by a long shot. Education is becoming more and more unattainable for many folks, especially if there is no plan in place. Costs are rising faster than ever, and declining public funds have had a drastic effect on how much you must spend to send your kids to college.
At private four-year schools, the average tuition and fees jumped by an astounding 26 percent over the last ten years. That may sound like a lot, but for public schools, things got even worse over the same time period. Statistics show that tuition plus fees at four-year public schools jumped 35 percent over the last decade! That’s a pretty steep rise in the amount you’ll need to pay to provide your children with higher education.
To put a finer point on it — the average cost of college is $20,770 for public schools (in-state) and $46,950 for nonprofit private schools, only including tuition, fees, and room and board.
Now, unless you happen to have about $50,000 laying around, it seems that one might need a plan to help pay for all of that educating. One way to help you set money aside for college is a 529 plan — something which comes with quite a few advantages.
For example: When you put money into a 529 plan, you can save money on a tax-advantaged basis. On top of that, you can withdraw from the account free of taxes for qualified educational expenses. You are also allowed to put a total of $15,000 every year towards the person you are saving for, and under the latest federal law, the federal government allows you to withdraw up to $10,000 to pay for students’ private K–12 tuition.
What exactly is a 529 plan?
According to the SEC, any 529 plan legally known as “qualified tuition plans” are tax-advantaged savings plans, designed to encourage saving for future education costs. There are two types of 529 plans.
1. Prepaid Tuition Plans
FINRA describes prepaid tuition plans as plans that allow parents, grandparents, and others to prepay tuition at today’s rates at eligible public and private colleges or universities, helping them manage future costs. Most prepaid tuition plans are sponsored by state governments and are not guaranteed by the federal government. They have residency requirements for the saver and/or beneficiary. They have some restrictions, such as not allowing you to prepay for tuition for elementary and secondary schools. Prepaid tuition 529 plans usually can’t be used for future room and board at colleges and universities.
2. Education Savings Plans
These are used to pay for tuition, mandatory fees, and room and board. You can access funds from education savings plan accounts to pay any college or university. This includes some non-U.S. colleges and universities. Education savings plans can also be used to pay up to $10,000 per year per beneficiary for tuition at any public, private or religious elementary, or secondary school. All education savings plans are sponsored by state governments, but only a few have residency requirements for the saver and/or beneficiary.
If you need to save for your kids' education, then take a look at 529 plans. Figure out which is best for you. Make sure you do all your research, so you know all the fees and expenses which are possible.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.