The cost of college is skyrocketing. If you plan to save for your child's college education there is one number you need to know — 529.
But before we delve into the specifics of a 529 college savings plan, let's discuss the four things you must do when saving for your child's education.
1. Start early in your child's life. This is math your first grader knows — the earlier you start, the more you save.
2. Take the advice you give your kids — do your homework! There are a multitude of options out there. Research them, ask questions, and make an informed decision.
3. Just do it. It doesn't matter how much you save as long as you save something. The cost of college is not likely to decrease in the next dozen years, so as my father says, "It beats a zero."
4. Remember, it takes a village. To get more bang for your buck, ask if grandparents or other relatives want to make a monthly or yearly contribution. Maybe they'd be willing to cut back on a holiday gift in order to chip in a small sum towards college. Over time, a little bit will go a long way.
Now, back to our lesson.
A 529 plan is an investment plan offered by states and other entities to make saving for college easier. 529 plans come in two sizes — college savings plans and prepaid college plans. The one that's right for you depends on your budget, appetite for risk, and the length of time before your child heads off to college.
A college savings plan places your money into a mutual fund or other investment vehicle. If your child is young, you might be more aggressive with an investment plan, hoping to grow the money over time. However, if watching the fluctuations of the stock market is not your idea of fun this might not be the best option for you.
A big benefit of a college savings plan is choice. Your child can choose to use the money at most schools across the country, and you can choose to invest in a college savings plan set up in another state. You can also choose to contribute large sums of money to a college savings plan, but know that you will have to contribute a lot of money if you hope to cover the entire cost of four years of college, housing and other fees.
A prepaid tuition program might make more sense if your child is planning on attending college in the next few years. This plan enables you to pay a lump sum today or set up installment payments to lock in the price of college down the road.
But these programs are pricey, too. For instance, parents of a newborn in the state of Florida would pay $297 per month to cover four years of tuition and fees at one of the state's universities. Two years of housing would cost an additional $81 per month. And because a prepaid program is generally only accepted at set number of colleges and universities, your child's choice of college is limited. If your child chooses to attend a college that is not covered by the prepaid plan, the money can be used for education costs but likely will not cover the full cost of tuition.
Before you select the plan that's best for your situation, find out if there are fees associated with the plan and if there are any tax benefits. Learn more about 529 plans by visiting the SEC and the College Savings Plans Network websites.
This advice is not a substitute for advice and instruction for professional financial advice. Please consult an accountant or other financial professional before making any decisions on college savings and investment plans.