Do you have children (or plan on having children) that you would like to see go to college some day? Do have have any idea how expensive college will be by the time they graduate from high school?
On average, tuition tends to increase by approximately 8% per year. If this will hold true for the future, that means that a school that costs $20,000 per year today will cost about $80,000 per year 18 years from now. That’s $320,000 for your child’s college diploma!
What’s the best way to plan for these expenses? The answer for many people is the 529 Plan. This is a tax-advantaged savings plan designed to save for a future student’s tuition. These 529 Plans are sponsored by states, state agencies, or by an institution.
There are two types of 529 Plans:
- Pre-paid Tuition Plan – With this plan, you’ll pay for college credits at today’s price, but can redeem the credits in the future
- College Saving Plan – This plan is very similar to a Roth IRA. You’ll open an account and choose between various investments that will hopefully yield a large return for your future school expenses. The best part of this plan is, the money can be taken out tax-free, as long as it’s used for colleges purposes (tuition, housing, books, etc).
Which Plan Should You Choose?
Quite honestly, both of them offer a better option than just sitting on your thumb, hoping that college prices will not inflate. So, if you weren’t aware of these options before and you decide to invest in one of them now, consider yourself a winner.
Out of the two, however, I know I’m leaning toward the College Saving Plan. Here’s why:
- The Pre-Paid Tuition has limitations on which institution your child can attend. The College Saving Plan allows them to attend any school imaginable.
- The Pre-Paid Tuition saves you the 8% inflation, but the College Saving Plan could average a higher yield.
- The College Saving Plan earns a higher yield, while also being tax-free.
- The Pre-Paid Tuition will only cover the tuition costs, whereas the CSP can apply to tuition, housing, books, and any college expense.
Downsides to the College Saving Plan
- This plan is subject to move up and down with the market (since it’s basically mutual funds investing). If the market goes down, your CSP will most likely go down as well. There’s no guarantee that it will yield more than 8% per year.
- There will most likely be fund managing fees that will limit your fund’s growth
As I stated before, don’t worry so much about which fund will yield the biggest payout. It’s honestly a toss-up. Just make sure you choose one and avoid doing nothing!
Have you considered one of these plans for your children? Which one would you choose if you had to?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.