Help Your Kids Beat the Rising Cost of College With a 529 Plan

Year after year, the cost of a college education, the national amount of student loan debt and the number of college students graduating with student loan debt is rising. One way that parents can help combat these costs is by investing in a 529 college savings plan.

A 529 plan is a tax-advantaged investment account that is designed to help families save for college. Much like a Roth IRA, investments in a 529 savings account grow tax-free and typically consist of mutual funds. These funds mature over a time and are then spent on approved college-related expenses. Investing in a 529 account has several advantages.

Why It’s Good

First, many states offer income tax deductions on some, or all, of the funds contributed to a 529 plan. Additionally, the amount invested grows tax-deferred, and funds eventually spent on college-related items are tax-exempt.

Investing money in a 529 plan is also an easy and hands-off way of building college savings. There is a small amount of initial legwork that goes into choosing and enrolling in an account, but once set up, funds can be automatically contributed via direct deposit from your paycheck.

These can be small and incremental amounts that will likely go unnoticed and unmissed in the short-term, but can grow over the course of 18 years. Even as little as $20 each week, with a little help from the market, can pay for a nice portion of a college education.

Finally, the primary donor of the plan controls fund distribution. That means expenses like tuition, room and board, books, computers and the like can be doled out by the parent, guardian, grandparent or whoever else is in control of the plan. The result is the avoidance of temptation on the part of the student to buy a car, television or football tickets.

Other Considerations

If a 529 plan sounds like a viable option for your family, you’ll certainly want to do a little more research. With the increasing popularity of 529 plans, there are many options now on the market. Additionally, we’ve only looked at the popular 529 savings plan, but there are also 529 pre-paid plans where college credits can be purchased at current rates and then used at a later date (just think Forever Stamp).

Visit the IRS’s 529 Q&A page for more technical information, or just do a quick online search to uncover some of your current options.