The Danger of Delaying College Savings

Friday, August 16th, 2019

By: Peter Vander Ploeg, CFP®

College has become expensive.  The data tells us why.  The costs of college have risen 3x the rate of inflation this century1, as shown in the table below.  Unfortunately, it looks like the costs are expected to continue to rise at a rapid rate.  With students graduating with more debt than ever before2.  It seems more important than ever to create a plan to save for college.

 

The best savings plan for college has increased in popularity since its inception in 1996.  It’s called a 529, named after the IRS Code 529.  These plans are great vehicles to save for the college costs of loved ones or even yourself because the funds grow tax-free over time.  They come with a tremendous amount of flexibility – you can use the funds for higher education, qualifying two-year schools, trade schools, and vocational schools.  Also, although unfortunately not in Colorado, changes enacted with the Tax Cuts and Jobs Act allow 529 plan withdraws up to $10,000 to pay for private K-12 tuition per student3.

So how do you go about setting up a 529 plan and how much should you save?  Start with your state plan.  You can research the quality of your state program on savingforcollege.com. If your state is a lower rated program, or you aren’t eligible for a state tax deduction, pick a high-quality program in another state.

How much you should save is dependent on your situation but starting early is best.  One option, unique to 529 plans, is front-end loading contributions in year one with five years of the annual $15,000 gift exclusion.  A grandparent or parent would be able to gift up to $75,000 in the first year, while receiving a state tax deduction themselves.  That would be a great head start!  Here are some hypothetical examples of a consistent monthly deposit starting at different ages.

 

Stay tuned for our next blog on the Colorado College Opportunity Fund – another great way to save for your child’s education.  And, as always, give us a call if you want to start a conversation about your situation.

Sources:

1 https://www.wsj.com/articles/college-still-pays-off-but-not-for-everyone-11565343000

2 https://www.wsj.com/articles/the-long-road-to-the-student-debt-crisis-11559923730?mod=article_inline

3 https://www.kiplinger.com/article/college/T002-C032-S014-what-to-know-about-college-529-savings-plans.html