Saving for Your Child’s College Education

June 28, 2019

Benjamin Franklin once observed,

“An investment in knowledge always pays the best interest.”

Indeed, planning for your children to attend college is one of the most important investment decisions you’ll make in life. That plan must be developed, reviewed and adjusted many times through the years, long before your child dons a cap and gown to celebrate graduating from high school.

There are a number of options available to parents who want to plan ahead, saving for their children’s college education. A 529 plan, named after section 529 of the Internal Revenue Code, is a tax-deferred college savings plan that is extremely popular for many families. In addition to being used for K-12 tuition, 529 plans can be used for college expenses, including tuition, books, room and board.

Designed to allow parents tax-free withdrawals for qualified educational expenses, 529 plans are a smart option for most, but not all, families. There are potential tax consequences for not using all the funding toward higher education. For some families, a combination of a 529 college savings plan plus another investment savings account might be the most strategic option to avoid overfunding the 529 account and incurring penalties down the road.

Generally speaking, there are two types of 529 plans: savings plans and prepaid tuition plans. Savings plans, which fluctuate with the stock market, allow parents to save for a child’s education tax-free through various investment options like mutual bonds and funds, money market funds, and age-based portfolios. Prepaid tuition plans, which lock in current tuition rates, are designed for families who may be hesitant about linking college funds to the stock market.

Parents selecting a 529 savings plan need to plan accordingly, based on the level of funding they ultimately want to provide. Are you funding a percentage of an undergraduate tuition or covering all expenses from freshman year all the way through a doctorate degree? Regardless of your ultimate goal, you’ll want to focus on performance, cost and control over investments in order to design a well-funded 529 plan.

Performance
When do you need to start saving into a 529 plan? Immediately, if not sooner. The earlier you get started, the more compound interest you’ll earn, and the longer you earn money, the better off you’ll be. Investigate what plans are offered by your state and others and compare and contrast. While you may live in Georgia, the costs and benefits vary from state to state, and another plan may be a better choice for your student. For example, Utah, Arkansas, and Nevada offer 529 plans that are more customizable with lower costs.

Cost
Keep in mind that the total cost of attending college is more than just tuition. You’ll need to factor in room and board, books, computers and study abroad programs, just to name a few. There’s also a tremendous difference between saving for the University of Georgia ($12,080 per year for tuition and fees for Georgia residents) and saving for an Ivy League school like Harvard University ($51,925 per year for tuition and fees). And if you are counting on the HOPE Scholarship for an in-state school, remember that it’s likely that HOPE funds will decrease in the future, since that program is tied to lottery revenue growth and can’t be guaranteed 18 years down the road.

Control
Unlike other savings accounts, a 529 plan gives the account owner control and flexibility and allows for higher contribution limits. Any family member can open a 529 account and anyone can contribute to it, whether they are the student’s grandparents, aunts or uncles. Funds are also transferable between siblings at no penalty, so if one child needs more money and one needs less, you have the flexibility to make adjustments in the future. In addition, you can open an after-tax account in the parents’ names as an alternative to a 529, which allows funds to be used for non-educational purposes, in case it’s not used for college.

It’s important to determine how college saving fits into your overall financial plan, set and achieve goals, monitor changing rules for college savings accounts and adjust for cost inflation for future tuition. Working with a financial planner is critical to help you achieve your goals.

Want to learn more about 529 plans and other ways to save for your children’s college education? Please reach out to us to get started.

AUTHOR:

SCOTT McGHIE, CFA, CPA