Although you prefer that your child attend college after graduating from high school, the cost of higher education might keep up awake at night. Regardless of whether your child attends an in-state or out-of-state school, the cost of a four-year degree can exceed $20,000. Federal and private loans are available to pay the majority of college expenses, but loans can result in costly debt. It take some graduates up to 20 years to pay off their student loan debt, at which time they spend a ton on interest.
There is another option, and if you’re planning to help with your child’s educational expenses, a 529 saving plan might be the answer. This educational savings plan is a practical and simple way to set funds aside for future college expenses. Understand, however, that this isn’t your ordinary savings account. A regular savings account earns very little interest, and if you relied on these accounts to build your kid’s college fund, you would never save enough.
A 529 savings plan is comparable to a 401(k) or an individual retirement account. There are a variety of investment options, and your contributions can be invested in mutual funds, stocks and money market accounts. The ability to invest your funds provides the greatest opportunity to maximize your savings. Unfortunately, there is also the risk of losing money, as funds in your account can fluctuate according to economic trends.
But despite this risk, a 529 plan can put you a step closer to your savings goals. If you feel that an educational savings plan will work for your child, here’s how to get started.
1. Check plans offered by your state.
529 savings plans vary by state, and when choosing a plan, you should start with your home state. There is no rule that says you have to invest in a plan offered by your state, but there are certain advantages. For example, your state might offer residents certain tax incentives. This can include tax deductions for contributions or perhaps tax-exempt withdrawals. Investing in a state plan can also help your child qualify for matching grants offered by the state. These incentives are not available if you invest in another state’s plan.
2. Compare other state plans.
Even if you’re satisfied with 529 plans offered by your state, do not make a decision without first reviewing plans offered by other states. Features vary, and depending on your financial situation, you may need a plan with a higher contribution limit or a lower minimum contribution. Investing in a plan offered by another state will not affect you child’s college choices. For example, if you live in Virginia and purchase a plan from North Carolina, you child can use funds to attend a school in a completely different state.
3. Open an account.
There are several ways to enroll in a 529 savings plan. This is a type of investment account. Therefore, you can work with a brokerage firm through your bank or contact your financial planner to get started. You can also enroll directly with a 529 program manager and bypass a broker or planner. Minimum contributions and plan fees vary by state.