As you are probably aware, the cost of obtaining a college education is an extremely expensive one these days. Even students and families from an upper middle class background can feel pinched by the burden created by tens of thousands of dollars in tuition costs, textbooks, and living expenses. This grim situation has increasingly forced students to turn to parents and family members for college financing assistance.
Our post-recession economy may not be an easy place to navigate as a college grad, but it is far less perilous for those who hold a degree than for those who do not.
Consequently, many people are taking out loans and assuming the burden of college debt, having little other choice but to pursue an education and hope that things work out.
In fact, many families — even those that would never provided financial assistance a generation ago — are now opening 529 plans and treating college savings like a retirement account: they put money in on a regular basis, keep it separate from all other online banking funds, and hope that it grows enough to pay off tuition, loans, or future debt.
A 529 plan is a tax-advantaged fund that can be used solely as a vehicle for college savings. If you or your child is currently attending school (or is planning to attend in the future), it’s an investment that you likely want to keep in mind.
Here are a few tips for getting the most out of your 529 plan:
- 1. Start as early as possible. The best advice for retirement savings is also the most important when college costs are concerned: start early. Even if you don’t plan on paying for most of your child’s college education, opening a plan when they are young (or, even better, when they are born) provides the maximum opportunity for the plan to grow over time.
- 2. Get a 529 savings plan. There are two types of 529 plans: savings plans and prepaid versions. While both confer advantages upon the student and the student’s family, the savings plan is usually preferable as it allows for maximum returns. This is because prepaid plans simply hedge against inflation while savings plans allow for full investment in the market.
- 3. Know which funds are being invested in. While it is best to keep a hands-off approach with your 529 plan from a spending perspective, this does not mean you should ignore where your money is being invested. On this note, make sure that you know what underlying investments (likely mutual funds) constitute the bulk of your fund.
- 4. Lower your risk as payment approaches. Some people are too conservative in their 529 investments and others tend to take too many risks. Perhaps the best way to forge an appropriate balance (a balance that insures maximum returns without putting savings in jeopardy) is by balancing the fund to make investments less risky as college payment approaches.
- 5. Spend all plan money on tuition, books, and related college costs. This may go without saying, but one of the major disadvantages of the 529 plan is that it incurs a heavy tax penalty if any funds are spent on non-college costs. This issue can be avoided by simply being responsible with the way you draw cash from the account.
These are some of the main tips to keep in mind when using a 529 plan. Although the plan somewhat limits a person’s investment options and can lead to significant penalties if incorrectly used, there are few better options when college savings are concerned.
With this in mind, then, it is important that every student and family understands the 529 and knows how to maximize the benefits.