Are 529 College Saving Plans Good for Your Family?

Are 529 College Saving Plans Good for Your Family?

Student Load Debt is at crisis levels

Student loan debt has now surpassed the alarming sum of 1.5 trillion dollars ($1,500,000,000,000) and is increasing rapidly! This debt load which averages $37,000+ per student is severely impacting not only the lives of the students themselves but also that of the American economy.

Student loan debt by balance amount.
STUDENT LOAN BORROWERS BY BALANCE AMOUNTS

And here’s what the post-secondary costs are estimated to be by the College Board in 2019.

What is a 529 Plan?

A 529 College Savings Plan (529 Plan) is a tax-advantaged savings plan designed to promote saving NOW for future college costs. Eligible costs include those at community colleges and vocational education schools as well as 4-year colleges. 529 Plans are sponsored by state governments, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. If you use the money invested in a 529 plan for education expenses, the gain in your investment is tax free! The cost to open a 529 Plan account varies between $15 and $25 generally and enrollment can be done online.

IF YOU ARE THINKING OF SENDING YOUR CHILDREN TO COLLEGE OR VOCATIONAL SCHOOL, READ ON!

What are my 529 Plan options?

There are two types of 529 Plans: Prepaid Tuition and Education Saving Plans:

Prepaid Tuition
The Prepaid Tuition option allows a parent to purchase units for future college tuition and fees AT CURRENT PRICES. So, for example, if tuition is $5,000 a year at your preferred college today, you could buy 100 units for $50 each and have your 5-year-old child’s first year tuition completely paid for when he/she reaches age 18 and the tuition is now $10,000 a year—or more!

Know that each year the price per unit is adjusted to reflect the change in tuition prices so start investing in units as early as possible. Also, be aware that not all Prepaid Tuition plans are guaranteed against loss by the FEDERAL government but some 529 Plans are guaranteed by state governments so be sure to check before you invest.

Education savings plans

Education Savings Plans (ESPs) require you to open an investment account. These plans are sponsored by state governments and have preferred providers. For example, in the state of Nevada, SSGA UPromise is a 529 Plan provider but not in Washington State where the only provider is BNY Mellon. You do not, however, have to use BNY Mellon if you are a Washington State resident as most 529 ESPs can be purchased by residents of any state.

Which 529 Plan is best?

State Income Tax Advantages

The advantage to buying a 529 Plan in your own state could be the opportunity to write off part of your investment against your state income taxes. Over 30 states, including the District of Columbia currently offer a state income tax deduction or credit for 529 Plan contributions. Seven states allow a state income tax benefit for contributions to any 529 Plan. They are:

  • Arizona.
  • Arkansas.
  • Kansas.
  • Minnesota.
  • Missouri.
  • Montana.
  • Pennsylvania.

No Guarantee

State governments do not guarantee investments in ESPs. Education savings plan investments in mutual funds and ETFs are not federally guaranteed either, but investments in bank saving accounts via the ESP are generally insured by the FDIC. Recent legislation.

Make your money work for you!

Recent legislation

Recent federal legislation now also makes K-12 education expenses eligible for 529 ESPs but not Prepaid Tuition plans . Another distinction between Prepaid Tuition and ESPs is the education savings plan’s ability to use proceeds for more than tuition and fees like room and board. You could, for example, have both a prepaid and an education savings plan for your child; the first paying tuition and fees and the latter, room and board.

What returns can I expect from my 529 Education Savings Plan?

The three-year average returns from state-sponsored Direct to Consumer 529 Education Savings plans have been between 30 and 80 percent! California was the worst state 529 Plan with a 32.04 percent return while Montana was the best with a 87.34 percent return! Please see this link for a comparison of the 1, 3 and 5-year returns by state. https://www.savingforcollege.com/529-plans/three-year-529-plan-rankings-direct-plans .

As of July 2019, the 3-year return for the S&P 500 was 37.12%.

AVERAGE RETURN OF S&P 500 FROM 1973 TO 2016 WAS ABOUT 11.69%

Why use a 529 Plan if the returns are similar to those of the US stock market?

The primary reason to use the 529 Plan vehicle is that the GAINS are tax free if used for education expenses. If you are simply invested in the US stock market without a 529 Plan, you will have to pay federal income taxes on the gains in your stock portfolio—at your income tax rate!

Average US Saving Account Rates

In comparison, the average savings account rate among U.S. banks has only recently increased to 0.09% annual percentage yield (APY.) https://www.valuepenguin.com/banking/average-savings-account-interest-rates .The largest banks only offer 0.01% APY on their standard savings accounts. At that rate, a savings balance of $10,000 would earn just ten cents a year. Clearly savings accounts are not the best way to save for college, but they are a smart way to save for emergencies. Online savings accounts offer a slightly better deal, with interest rates of up to 2.00%.

REACH FOR THE SKY!

In Summary…

On average, students with a college degree will earn approximately $1,000,000 more in their lifetime than students who only have a high school diploma. That’s 35% percent or $21,000 less each year than a college graduate.

Between 2000 and 2011 college tuition increased 213 percent and it’s still increasing.

College is only getting more expensive!

In addition, public funding for education has decreased sharply. In 2015-16, appropriations per FTE student were 11% lower in inflation-adjusted dollars than they were a decade earlier and 13% lower than they were 30 years earlier.

BOTTOM LINE—Open a 529 Plan and start saving for your family’s future education expenses NOW! If your children don’t go to college or a vocational school, the 529 Plan benefits can be transferred to you or to another extended family member!