But most of us had no idea how complex and stressful the behind-the-scenes work is to make that defining moment happen. Some parents have been saving since the nursery for the big day, some parents are terrified of the tuition bills and loans to follow, some parents are so glad their children are making something of themselves that they haven’t even thought about the money involved.
Tuition Prices Always Rising
Yet college tuition, the household expense that has increased faster than any other since 1983, has real and far-reaching financial impact. Gone are the days of simply getting a part-time wage-slave job to “work your way through,” and scholarships can be unreliable and hard to come by.
In the last few decades, tuition prices have risen five times as fast as home prices and twice as fast as medical expenses. College prices have gone up 6.5% per year, doubling the tuition cost on average every 11 years. Current costs per year: $20,000 at a public college and $47,000 at a private college, and this trend is always going upward.
Add to this the fact that high-income families are often less eligible for financial aid such as grants and low-interest loans because these are usually based on financial need. Financial aid isn’t just plain “free money” anymore, and can have far-reaching impact on a young person’s life.
529 Plan – Paying Tuition Now to Prepare for Then
529 Plans for college savings offer a solution for college savings that’s affordable and tax-friendly. Named for the Qualified Tuition Program under Section 529 of the Internal Revenue Code, these savings plans let you put money away for your child’s tuition that can later be withdrawn tax-free for qualified expenses (tuition, room and board, etc.) for higher education.
These plans break down into two main types:
- Pre-paid tuition plans – This is a plan for paying a specific school (or small list of schools) ahead of time, at any point in a child’s life. One of the major advantages here is that the tuition gets paid at its current rate – paying for your child’s first year in 2019 is going to be much less expensive than it will be in 2029.
- Saving Plans – This is a savings plan similar to an IRA, in that it’s a tax-advantaged ways to save for the long term. Contributions can be made up to the limit of the plan and then withdrawn tax-free for any qualifying expenses at any institution. On the plus side here, there’s freedom for the student to pick the school they want when they’re of age.
529 Plans for college savings also allow for gifting from grandparents or other family members. Again, this money can be locked down and grow, cutting down on the temptation to use an inheritance or gift for an impulsive or emergency purchase.
A 529 Plan can become a tremendous gift to a young person, and their parents by extension, to help them get a start in the right direction on adulthood.
Your Child’s Education, Your Retirement – Striking a Balance
There’s a well-worn metaphor in finance, as well as other aspects of life – the airplane oxygen mask. We’ve all heard the steward’s speech that “in the event of an emergency,” oxygen masks will drop from the ceiling. You are always directed to put your own on – to insure you don’t pass out – and then to help a child or someone else put one on. The metaphor being that if you aren’t taking care of yourself – i.e. if you’re passed out in a metaphorical airplane seat – you won’t be able to help anyone else.
This area of finance can be similar. The natural instinct is to put away money for your child’s future, regardless of the outcome for yourself and your spouse in the long run. Yet at the end of the day, financial uncertainty in your retirement could mean financial stress for your kids if they are supporting you.
The fact is that Americans as a whole owe more in student loan debt than credit card debt, and this doesn’t show signs of stopping anytime soon. Loans paid back with interest end up costing you (or your child) much more than putting the money away upfront, and then gaining interest while those funds mature.
Back to the airplane mask analogy: planning for your retirement is a way of taking care of yourself so you can also care for your children. 529 Plans for college savings, IRAs – these savings vehicles help you invest in your – and your family’s – future peace of mind.
More to Balance than the Books
At Pleasant Street Wealth Advisors, we know that money ties into family, which ties into relationships. There is more to the story than figures on a spreadsheet, and more to balance than simply the books.
As a father and son team, we’ve been through more together than simply business. We know that relationships are higher goals than returns, and see finance from that holistic perspective. The 529 Plan for college savings is one of several options we can discuss with you about how to plan financially with your whole family’s future in mind.