Are you suffering from shortness of breath, headaches, and nausea? Before you seek medical attention, ask yourself this: Do these symptoms seem to strike when thinking about paying for your kids’ college education? If the answer is yes, you may be suffering from collegecostphobia (the fear of paying for the staggering cost of college). Don’t fear, you are not alone and help is available.
No, I’m not talking about taking yet another prescription medication. I’m referring to some concrete actions you can take now, so that by the time your child goes off to college, you’ve already taken care of a significant chunk, if not all, of the costs. Doing so will go a long way towards giving you and your child some peace of mind.
Not Getting Any Cheaper
Let’s be clear. A college education from a good school does not come cheap. In today’s dollars, the total cost of college (i.e. tuition, room, board, etc.) at an in-state four-year university will cost close to $100,000 and double or triple that for an out of state or private school. Furthermore, costs continue to go up faster than the rate overall rate of inflation.
Feeling worse? Consider this. While the cost of a college education is daunting, contributing to a tax advantaged college savings vehicles such as a 529 plan can help you greatly when it comes to meeting your objectives.
Harnessing the Benefits of a 529 Plan
There are two types of 529 plans: a savings plan and a prepaid plan. The big allure of a 529 savings plan is that it allows contributions to the plan to grow federal tax-free as long as the distributions are ultimately used for qualified educational expenses. Most expenses associated with attending college (i.e. tuition, room, board, etc.) are considered qualified. Do not underestimate the tax benefit. For those that start contributing early with many years of growth ahead, the tax avoidance savings can be very significant.
Depending on the plan, owners of 529 accounts select investments from a list of actively managed mutual funds and index funds. Most plans also offer static portfolios with fixed allocations as well as age-based portfolios that automatically get more conservative the closer a child gets to college age.
In contrast to a 529 savings plan, a prepaid plan is a contract offered by the state or academic institution that will allow you to lock in today’s tuition rates by essentially prepaying for tuition today. This enables you to lock in the price of college tuition (prepaid plans only cover tuition, other costs not included) without having to achieve returns in a 529 plan that meet or exceed the rate of tuition inflation. Each plan has different rules for dealing with situations where your kids ends up going out of state or skips college altogether. Therefore, it’s important to read the small print if you decide to use a prepaid plan as part of your college funding plan.
Be Wise and Systematize
For those having kids today, the same $100,000 price tag in today’s dollars will cost over $200,000 by the time your child starts college (assumes a 4% annual increase in costs). Almost too staggering a number to contemplate as a goal? Given the tax benefits and power of compounding, you could achieve that savings objective by contributing roughly $465 per month into a 529 plan (assumes a 6% annualized return). If that’s still too significant, rather than do nothing, pick a more attainable and reasonable objective, like paying for one year of college in advance by putting away roughly $150 a month. The key is to set some goals and start working towards achieving them.
Get the Family On Board
Another benefit of a 529 savings plan is that family and friends can contribute to the plan you’ve set up for your child. Next time your kid has birthday or special celebratory occasion consider encouraging gifts be made to the college fund. Some financial institutions have even begun making this easier by enabling you to harness the power of social media to further your fundraising cause. Click here to see a new tool offered by Fidelity Investments.
So there is a cure to collegecostphobia. It involves saving early, setting achievable savings goals, being systematic about your savings, and taking advantage of tax advantaged 529 savings plans. Doing so will go a long way towards achieving your college funding objectives.
Specific college costs and other useful tools pertaining to funding a college education can be found at www.savingforcollege.com.