529 Plans- The Best Choice for College Funding

In just a couple of months hundreds of thousands of young adults will be headed for college…and facing ever-rising tuition and fees.  The average annual cost for a public college is around $25,000 and you can expect about double that amount for private colleges.  Many college students are taking five years to complete their college degree so total costs can easily run from $100,000 to $250,000 or more.

Is a college education worth the money?

One question that continues to be asked, “At these levels of costs, is a college education worth the money?”  Research suggests that a student who obtains his or her college degree can expect to earn an average of $2 million more during his or her career than students with only a high school diploma.   Obviously, this is a huge financial difference but we are dealing with averages which means some college graduates will spend the money to get that college degree and end up with relatively low paying jobs.  The takeaway is that you want to approach college decision-making with a long perspective.  In too many cases, I find students go to college because ‘it’s the next step’ without giving a lot of thought to their college course work, major or consideration of the job market after college.  This can be a big mistake, especially if you’ll graduate with student loans.  I encourage all parents of college-bound students to begin the conversation about the costs of college and choosing a path that will result in excellent opportunities for well-paying job prospects upon graduation.

What’s the best way to pay for college?

Assuming you start early, saving for college using a 529 plan is the best way to go.  Here’s why:

  • Tax deferred growth. While contributions to a 529 plan are not deductible, your investments will growth tax deferred…meaning no income taxes are due on interest, dividends or capital gains as long as the funds remain in the plan.
  • Tax free withdrawals. Money withdrawn from a 529 plan, when used to pay for ‘qualified’ education expenses, is tax free.  The great news is that qualified expenses are very broadly defined and include items you’d expect such as tuition, fees and books.  It also includes items you might not expect such as certain room and board, computer/laptops, computer software, internet access and related fees, and other school-related expenses.
  • State income tax deduction for contributions. Some states offer an income tax deduction for contributions to their 529 plan.  In Alabama, you receive a tax deduction for up to $10,000 in contributions per year (joint return; $5,000 for single return), saving you as much as $500.
  • You can move the money from child to child, depending on who needs the money.  You can also be the owner of the account which allows you to maintain control.  Any unused funds, you can withdraw and you’ll owe taxes on the earnings/gains plus a 10% federal penalty.

You should also be aware that there are two versions of the Alabama 529 plan; an Advisor version where you’ll pay commissions and a ‘self-help’ version with no commissions and very low expenses.  TIP: If you have five or more years until the first tuition check is due, allocate a large portion of your investments to stock mutual funds.

For more information visit College Counts 529 Plan. They have a nifty calculator you can use to estimate how much you need to save to fund college in general or a specific college.