David Kiner has already started saving for his children’s college education even though his daughter is just 2 years old and his second child hasn’t even been born yet.
“It is our hope that we will be able to help our children financially with their higher education costs so that when they graduate, they will not be burdened with tremendous debt,” said Kiner, adding that he and his wife are still paying off student loans at age 35.
There are countless ways to save for college, including savings accounts, traditional investment portfolios, long-term CDs and savings bonds. But 529 education savings plans are a hot topic among parents with kids still in diapers—and with good reason.
Parents Say ‘No Student Debt’ For Their Kids
Unlike other savings accounts, 529 education savings plans allow you to grow your money tax-free and then spend it, also tax-free, on education-related expenses. Those qualified education-related expenses include tuition, room and board, books, computers, and software. You can also spend up to $10,000 per year per child on elementary and secondary school tuition.
There were approximately 13 million 529 accounts in 2017, according to a report by the Pew Charitable Trusts, up 30% since 2010. The average account size—just over $24,000—is also rapidly increasing, up by 39% since 2010.
Parents who set up 529 plans for their newborns will likely reap the greatest rewards when their children are college-aged since their savings have had almost two decades to grow.
“I set up a fund for my now 6-year old-daughter within a month of her being born,” said Meryl Ravitz, a chief financial officer from New York City. “I used the NY 529 direct plan and picked a few funds.”
Though her daughter is entering first grade this fall, Ravitz is looking much farther into the future.
“I felt it was important to start saving early as college costs just keep increasing,” she said.
And with national student loan debt at an all-time high of $1.6 trillion, Ravitz and other parents are looking to give their children the best chance possible to afford a college education without taking on debt.
We break down what you should know about opening a 529 college savings plan.
Do Your Research on 529 College Savings Plans
Though 529 college savings plans are operated by each state, you do have a few options to choose from. Some states have more than one offering and you can buy out of state plans (though you’d miss out on the in-state contributor benefits that many states offer).
Kiner, an employee with the Connecticut Department of Labor, said their state program offered financial incentives, including a sign-on matching bonus, that made it an easy pick.
“There was a minimum dollar amount required in order to receive a $250 match from the Connecticut CHET program prior to your baby’s first birthday,” he said. “
You also have a few different options for buying in. You can purchase a plan directly from the state, which is called a “direct-sold” plan. You can also sign up through your financial advisor, though this option may cost you more in broker fees since you are going through a middleman of sorts.
Read the fine print
Many 529 plans have fees at the start, so that’s something to be aware of as you compare plans. According to the Securities and Exchange Commission, fees could include:
- Enrollment or application fees
- Annual account maintenance fees
- Ongoing program management fees
- Ongoing asset management fees
These fees vary based on your investment options. While state sponsors do charge some fees, you will generally be charged additional fees if you choose to open a 529 through a broker.
Set Your Budget and Contribute to Your College Savings Plan Frequently
College may be mind-bogglingly expensive, but your contributions don’t have to break your budget to add up.
Amanda H., a mom of two from Louisiana, started saving when she was pregnant with her children, now 9 and 12 years old, and then set up their 529 plans through the state when they were babies.
“Louisiana actually has a great plan,” she said. “Contributions can be deducted from state income tax and even at a high income, the state matches 2%.”
She and her husband automate their payments monthly to take advantage of that matching incentive. Their diligence is paying off. Their daughter now has about $30,000 in her 529, which won’t pay the full bill, but “it gives us options,” she said.
Ravitz makes her 529 contributions before the money even hits her bank account by having a set amount taken directly out of her paycheck each month and put into the 529.
“It’s forced savings,” she said. “I don’t even think about it.”
Consider Prepaid Tuition Plans
Natasha Wiest, a quality engineer in Florida, set up 529 education savings plans for her daughters, now 3 and nearly 6, as soon as they had social security numbers.
She and her husband contributed diligently for several years. But when Wiest and her husband located to Florida earlier this year, they decided to open a Florida 529 prepaid tuition plan for each child so their daughters’ tuition will be paid in full by the time they start college.
529 prepaid tuition plans offer similar tax benefits as 529 education savings plans, but they do come with one major bonus—you can lock in tuition prices at current rates. Prepaid tuition plans do have additional restrictions, however, such as residency requirements and guidelines on where you can use the money—typically public and/or in-state institutions.
The Wiests are now letting the 529 education savings plans grow without further contributions while they contribute monthly automated payments to the prepaid tuition plans.
“College is a major life purchase and it’s important to plan for it,” Wiest said, “We want our kids to be able to graduate college debt-free and be able to start adulting with a clean slate.”
Disclaimer: The opinions expressed by the interview subject are not necessarily those of Earnest.