Whether your child is in the driver’s seat or still in diapers, you’re ahead of the game if you’re saving – or planning to save – for college. Forty percent of parents have saved nothin.*
Most parents place high value on a college education. Yet many don’t save because they overestimate costs and feel powerless to ever save enough. In reality, some college price tags soar to $30,000 a year, but most are more affordable than you might think. More than half of students at four-year schools pay less than $9,000 for tuition and fees annually.** For the 2012-2013 academic year, the average cost to send your child to California State University is estimated at $7,025; $13,200 for the University of California.*** California Community Colleges are a bargain at $1,104.***
You don’t have to know whether your child is headed to Stanford or a public in-state school before you start a 529 College Savings Plan. Just know that the money you invest now can grow into the opportunity for your child to pursue many different choices.
In State or Out?
A 529 plan is a state-run tax-advantaged investment account. Your earnings grow income-tax deferred, and the money is also free from federal income tax when it’s used to pay for qualified higher education expenses.†
You can contribute to California's 529 plan, but there are 49 others out there for the picking. Who’s to say California has the best 529 plan? Figure in the following to find the best deal:
1. Fees: A high rate of return looks good until administrative and management fees take a bite. For example, a $25 annual account fee may not sound like much. But figure in 1.5% in total annual asset-based fees, and then compare to a plan that charges a $10 annual account fee and 0.9% in annual asset-based fees. The latter leaves more money in your account that will compound over the years.
2. Diversify: Like your other investments, you need the right mix between asset classes. If a plan is domestic large-cap heavy, your return may miss small-cap and international market peaks.
3. Time horizon: Similar to your retirement time horizon, your 529 funds shouldn’t be too volatile – even if they’re higher returning – if your child is close to college. A sensible asset allocation may include bonds.
4. Good management: Low-priced funds are important, but who’s managing the fund? The best 529 managers are the best managers in other markets as well.
5. Tax advantages: About half of states offer residents state income-tax deductions for in-state 529 contributions. At this time, California does not offer a state income-tax deduction. However, earnings can be used for qualified education expenses free of federal and California income taxes.
It’s hard to get motivated to save if you aren’t confident you’ll save enough. Just remember, the earlier you start, the more your money can grow. To learn more about California's 529 plan, visit www.scholarshare.com/.†† To learn about other states' 529 plans, visit www.savingforcollege.com.††
* Source: salliemae.com.
** Source: “Keep Rising Prices in Perspective,” College Board. 2007-2008.
*** Source: CaliforniaColleges.edu
† Withdrawals for nonqualified expenses are subject to income tax and a 10% tax penalty.
††Web site is provided for information only. No endorsement is implied.