Set Your Children Up for Success: 529 College Savings Plans

As a child of immigrant parents, I always knew that school was not only my ticket out.  Naturally, getting a good education became my mission.  After earning a full ride to attend college, I thought I had beat the system.  At 23, with no debt, savings, or guidance, the decision to take on a $200,000 student loan to attend law school was a simple one.  After all, I was certain I would be super rich right after law school…then reality hit.   

Currently, over 43.5 million borrowers have federal student loans carrying an average balance of $37,574. 

I constantly get asked, “knowing what you know now, would you still take on such a massive loan to attend law school?.”  Sadly, my answer is yes.  My degree has changed my life.  However, I am now on a mission to ensure that my child has different alternatives.  To prepare for her educational expenses, I chose to invest in a 529 college savings plan. 

In this blog post, we’ll explore the basics of 529 college savings plans, what they are, how they work, their benefits, and key considerations for those looking to investing in them.

What is a 529 College Savings Plan and Why Should You Have One?

Named after Section 529 of the Internal Revenue Code, a 529 college savings plan is a tax-advantaged account.  These accounts are designed to help families save for future education expenses.  529 plans are administered by state governments or educational institutions.

There are two types of 529 plans—college savings plans and prepaid tuition plans.  Prepaid tuition plans allow you to prepay tuition at today’s tuition rates at eligible public and private colleges or universities.  Prepaid tuition plans are more restrictive, have residency requirements, and limit the use of 529 funds to tuition only.

In this blog post, we will be focusing on 529 college savings plans.

How 529 Plans Work

529 plans work similarly to other investment accounts, with a few key differences.  These accounts are specifically designed to help save for education expenses.  Education expenses can include college, trade school, or a number of other qualifying educational programs.  Qualifying expenses vary state-by-state and some include school supplies, K-12 education expenses, and even student loan repayment. 

It’s important to research and compare different state plans to determine which one is right for you.  Stop yourself before you freak out about doing this research.  (I did, and I read boring stuff for a living).  Saving For College has summaries and rankings of all 529 plans.  Although you can open a 529 account from any state, you should start by reviewing your own state’s 529 options as you may qualify for additional state tax benefits.  Once you’ve decided which 529 plan is best for you, you can open an account directly with your state, or you can open one through a trusted brokerage firm like Vanguard or Charles Schwab.

You can open a 529 college savings plan for any child in your life, but make sure to always consult the parent as you’ll need the child’s social security number or ITIN number.  

Benefits of 529 Plans

Investing in a 529 plan can ensure your child has access to educational funding.  This investment could determine where your child goes to school, the careers they choose, and their overall financial well-being.  The best part is that you do not have to invest a ton of money to make a big difference.  

If you save $100 a month from your child’s first birthday until they go to college at 18 years old, you would save $20,400.

If you invest that same amount in a 529 account, your money could grow to $39,240.  That’s an $18,840 difference!

(This is assuming a conservative 7% rate of return)

Use this 529 College Savings Calculator to get a personalized projection of future college costs and how much of a difference your 529 investments could make.   

529 plans offer several other benefits such as:

• Family & Friend Contributions: Most 529 plans allow the account owner to send a link to your family and friends so that they can contribute to this account for birthdays and holidays.  The set up is relatively easy, and contributions can be as little as $25.  
• Tax Benefits: Contributions to 529 plans are made with after-tax dollars, but the account’s earnings grow tax-free and withdrawals for qualified education expenses are also tax-free.  
• High Contribution Limits: Many 529 plans have high contribution limits, so you can save a significant amount of money for education expenses.
• Flexibility: 529 college savings plans can be used for a variety of educational programs, including college, trade school, and other eligible programs.
• Control: As the account owner, you have control over the account and can decide when and how the funds are used.  If your child doesn’t need all of the 529 funds, you can transfer the 529 to a new beneficiary.    

Considerations for Investing in a 529 College Savings Plan

While 529 college savings plan offer many benefits, there are some considerations to keep in mind before investing:

• Limitations on Use: 529 plans can only be used for qualified education expenses, and withdrawals for non-qualified expenses may be subject to income tax and a 10% penalty.
• Investment Risk: 529 plans are subject to market risk, and the value of your account can go up or down based on market performance.
• Fees: You can open up a 529 account completely free, but some 529 plans may have fees and expenses that can eat into your investment returns.  Beware of fees associated with plans you are considering.  Saving For College is a great place to start your research!
• Impact on Financial Aid: Money in a 529 plan is considered an asset and can affect financial aid eligibility.  However, compared to other types of savings, 529 college savings plans have minimal impact on financial aid. 

Always consult your accountant!

Remember that the best financial asset you can gift your children is financial literacy.  If you are not currently in a position to open a college savings account, that is okay.  Continue to learn more about improving your own financial well being and teach your children your money lessons early.  To learn about some of the basics to kick start your personal finance journey, check out our first post, Five Steps to Kick-Off Your Personal Finance Journey.

Comment below on other ways you’ve found to set your children up for success!