With the news that the US government plans to forgive millions of dollars in student debt, many families are having their own discussions about how to handle future school expenses. But families shouldn’t rely on potentially forgiven debt as an education funding plan.
How can we start saving for an expense that is rising almost twice the rate of average inflation? The concept can be disturbing. Planning for education on top of daily household needs and future retirement can be downright daunting. However, there are steps parents (and grandparents) can take to start planning while the kids are younger.
More than two decades ago, Congress passed legislation creating 529 college savings plans. Currently, millions of Americans use these plans as their primary means of educational planning. Over time, revisions to these plans have made them far more useful and applicable to recipients beyond the traditional four-year college. Plans are usually set up and owned by parents or grandparents, but anyone can set up a plan, regardless of their relationship to the beneficiary.
The plans are funded with after-tax dollars, but grow tax-free while invested. Withdrawals used for eligible educational expenses of the beneficiary can be made without tax consequences.
Each state sponsors its own 529 plan but does not handle the administration or investment management of plan assets. In Illinois, our state-sponsored plan is called the Bright Start College Savings Plan. Union Bank and Trust administers the plan and offers investment in mutual funds from several major institutional fund managers, including Vanguard and T. Rowe Price.
Account holders can create their own range of investments from the available options or use a predefined portfolio that changes over time as the beneficiary approaches 18 years of age. Illinois residents using the state-sponsored plan are also eligible for a state income tax deduction each year. on contributions up to $10,000 from an individual filer or $20,000 for co-filers. Recipients are not limited to using the funds only in their home country.
Account holders whose beneficiaries do not need all of the plan funds can simply name another person as beneficiary. For eligible scholarship recipients, account holders can choose to withdraw the scholarship amount from the plan without incurring a penalty. Owners are required to pay taxes on the income withdrawn.
Don’t be discouraged if you can’t accumulate everything needed to cover your student’s tuition. There are several ways to get additional help if needed.
Saving for your own financial security is equally important. I’m sure adult children would gladly take on some of their own debt early in life to avoid having to take their parents as roommates in the future.
This is intended for informational purposes only and should not be construed as personalized investment or financial advice. Please consult your investment and finance professional(s) regarding your particular circumstances.
Here’s how the cost of college has changed since the 1960s
A closer look at the rising cost of college in the United States
The cost of college since 1963
Four-Year and Two-Year College Cost Comparison
Increases in private schools have overtaken public schools
Accommodation remained a fixed part of the cost while meals decreased
Chris Ruedi is a financial adviser at Savant Wealth Management, Bloomington.