529 Plan For College Investing

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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:

  1. 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
  2. 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?

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Investing Money

Derek

AUTHOR Derek

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.

10 Comments

  1. I’m skeptical that college – esp. state schools – will really be as expensive as “they” are predicting.

    Both DH and I believe we wasted good time and money in college, pursuing careers we ended up not liking, and are going to groom our DS as a life-long learning entrepreneur.
    Emily recently posted..What Happened To YOUR Retirement Income

    • Unless you are an entrepreneur, college is increasingly important. For my work, I don’t necessarily need my degree, but without it, I doubt I would have even made it to the first interview. College is good for everyone, but all will not benefit equally from it.

  2. I like the College Savings Plan is better — I would hate to have my own college choices limited, or to limit someone elses’ college choices, by only permitting them to go to a particular school or a choose among a narrow margin of options.
    Paula @ AffordAnything.org recently posted..A Tree Fell on our House Last Night

    • I tend to agree with you Paula. If my parents told me that I had to go to one particular college, I certainly wouldn’t value it as much.

  3. whatever you do, a college plan is a must. I went back to compare my own uni fees and it went up from $16k during my time to $28k in 11 years!! that’s 75% jump.. if i add the fact that my home currency has depreciated 32% during the same period, the tuition fee is even more scary….
    B Kelly recently posted..Money 101- What’s Your Sweet Spot

    • Great point B Kelly! With inflation and the potential for less discretionary income, the college investment plan is pretty essential!

  4. I agree that it is good to start saving early for college. However, you may want to consider whether tying up a lot of money in a dedicated account for many years is best for your situation. Your child may end up getting a large scholarship or you may find you need the money for something else. If you don’t use it for education, the earnings can be taxed and subject to a 10% penalty. While the 529 is great for many families, there may be more flexible alternatives to consider.
    Dave recently posted..College Saving Plan- Section 529 Plan- College Savings Account

    • Quite true Dave. Also, if you have not yet set aside money for retirement, that is #1 on the list, unless you think your kids will enjoy supporting you in your retirement (not you personally, Dave. I’m speaking to the rest of the readers on this one).

  5. College is crazy expensive…even saving for it is hard. Its not like you can just put 50-100 bucks a month away for 10-12 years and be okay. You need to put some serious cash away. Don’t even get me started if you have 2 kids or they want to go to private school
    Travis@TradeTechSports recently posted..A No Frills Approach to Learn Option Trading Successfully Part 1

    • You’re right. College is pricey, and it’s about to get more expensive! Better start planning.


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