I had a chance to interview Michael Fitzgerald, Chair of the College Savings Plans Network and Iowa State Treasurer about 529 plans, one of the most common vehicles for college savings.
1) What is a 529 plan? When should one ideally be started and how late is too late?
529 plans are tax-advantaged investment plans. Withdrawals from 529 plans or qualified education expenses are free from federal income tax, plus many states also offer state tax-deferred growth and tax-free withdrawals for qualified expenses.
529 plans were designed as a way to encourage people to save up for college for their children or grandchildren (or any other designated beneficiary), and statistics show that students with any amount saved for higher education are six times more likely to attend a four-year institution than those without any savings.
Plans can be opened at any time and the College Savings Plans Network encourages people to start saving as soon as possible. However, people need to keep in mind that it’s never too late to start saving for higher education. You can open an account for an individual of any age and it can be used immediately.
2) How can parents calculate college costs - and how do they know that the cost will be worth it?
The cost of college is on the rise and has gone up nearly 51% over the last 10 years. Parents and grandparents can calculate costs for their children with CSPN’s college cost calculator available at: http://www.collegesavings.org/collegeCostCalculator.aspx
The costs are ultimately worth it. According to the US Census Bureau, college graduates early an average of $1 million more than high school graduates do over their careers.
3) Do 529 plans differ by state? If so, is it possible - or advantageous - to go out-of-state for one?
The plans do differ by state in that each determines how its 529 plan is structured and what investment options are offered. There are over 100 plans to choose from. While most plans allow investors from out of state, there can be advantages to sticking with an in-state plan such as a state tax deduction, a matching grant, and scholarship opportunities, protection from creditors and exemption from state financial aid calculations.
People looking to invest can compare the different state plans on CSPN’s website at http://www.collegesavings.org/planComparison.aspx
4) Why is it important to save early for college education?
No matter how much you save, even a little can make a difference over time. Just as with any other major investment, the key to saving for college is to start early and save regularly. It’s important to start saving early to ease the financial burden of college and avoid having to borrow money at a later date. For example, a family that saves $200 a month over 18 years at a 6.8 percent annual return will save $34,433, while borrowing the same amount at a 6.8 percent interest and repaying it over a 10-year term will cost them $396 per month in interest.
About College Savings Plans Network (CSPN)
Established to make higher education more financially attainable, College Savings Plans Network (CSPN) is a national non-profit association and the leading, objective source of information about Section 529 College Savings Plans—one of the most popular, convenient and tax-advantaged ways to save for college. An affiliate of the National Association of State Treasurers (NAST), CSPN brings together administrators of 529 savings and prepaid plans from all 50 states, as well as their private sector partners, to offer convenient tools and objective information to help families make informed decisions about saving for college. For more information, visit www.CollegeSavings.org. Follow CSPN on Twitter, Facebook and YouTube.
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