As the school year comes to a close, it can be a time to reflect on savings for college. Tuition for college in the United States ranges from $100,000 to as much as $160,000. When you add room and board, the amount can easily be over $200,000 for four years. In a recent Chicago Tribune article “Shop around when saving for college”, Gail Marksjarvis identifies that “relying on a savings account for example, typically falls far short. Savings accounts, while safe, barely grow. If parents saved $2,400 at the start of each year in a savings account, they’d have roughly $12,200 for college after five years”.
In comparison, the 529 college savings plan would yield $15,500 for the same period Markjarvis says. There are different options within the plan to choose from and some of those choices depend on the age of your child when you start out. For example if you start saving when a child is born, there is incentive to take more risk as the account will have time to recover and the yield is higher.
One of the big advantages of choosing a 529 savings plan is the tax benefit. All of the savings can be allocated to college without being taxed. This may not seem like a big deal initially however the impact is greater than we might think. Morningstar made the analysis taking the same $2,400 and investing it in a large fast growing mutual fund, the earnings could be $17,800 but with a 529 because of the tax savings it would be $18,440 Marksjarvis says
Every state is a little different, and 38 states offer additional incentives like grants if you used the 529 savings plan and added income tax breaks. There is flexibility not just within the 529 savings account but also choosing a plan from another state. Sometimes it is better to use your own state’s 529 plan however having quality investments outweighs some state benefits. According to Morningstar, the four top 529 plans are Maryland College Investment Plan, the T. Rowe Price College Savings Plan in Alaska, the Vanguard 529 College Savings Plan in Nevada and the Utah Educational Savings plan.
Over the past year there have been reduced fees which have helped to improve plans in most states. It is important to look at the 529 plan in your state to determine if it offers the right investment plan for you. Morningstar identifies three plans to avoid: CollegeAccess 529 in South Dakota, the Ivy Funds InvestEd 529 of Arizona and the Schwab 529 College Savings Plan of Kansas.
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