A child born 22 years ago is now scheduled to graduate from an average 4-year public in-state college. If his parents had invested a mere $140 per month, earning 6% per year1, they would have had the $76,974 needed to pay the child’s education, fees, room and board ($76,974).
A savings gap exists for most parents between their desire to provide their kid’s education and their ability to pay for it. 49% want to pay at least 75% of the cost, but only 32% are confident they can do so, according to a survey by Savingforcollege.com. The survey also found that 15% of parents would consider tapping their retirement savings to pay for their child's college, and 55% would be open to sending their child to a community college for two years to bring costs down.
Parents don’t have to take those drastic measures. They can boost their college savings by investing wisely. Parents can put a child’s college fund in many places: a savings account, an investment account or an individual retirement account. But there’s one account that is specifically designed to help you save for a college education - a 529 College Saving’s Plan2.
Most Americans don’t know what a 529 College Savings Plan is. In simple terms, it is an investment plan sponsored by a state government, where the earnings from the plan are not subject to federal tax, and generally not subject to state tax, when used for qualified education expenses, such as tuition, fees, books as well as room and board.
For the 2015-2016 school year, the average in-state tuition, fees, and room and board for a public, 4-year university was $19,548, according to the College Board, up 3.3% from the previous academic year. At a private, 4-year college, the average tuition, fees, room and board is $43,921, up 3.5% from the previous academic year.
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1 This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. This example does not reflect any taxes or fees and would have been lower if it did. Actual results will vary. Past performance does not guarantee future results.
2 The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.