The Pros and Cons of College Savings Plans

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The Pros and Cons of College Savings Plans - Stash Wealth
Photo by Aaron Burden on Unsplash

If you have kids or are thinking of having kids, saving for college is a major concern. And if you’ve done any research at all, chances are you’ve heard of a college savings account, specifically a 529 plan. In fact, your parents may have even had a similar account to help pay for your school, if you were lucky enough to have parents that helped out. So should you open one up for your little ones?

 

College savings accounts are great vehicles to be able to save for college, and bonus, you get tax free growth on the funds. Some states even offer a tax deduction on contributions to college savings accounts. If your state doesn’t offer a deduction, you can look for plans in other states that have low fees and offer better investment choices. However, if your state does offer a deduction, it would make sense to use the plan offered in your state. Basically, if there are any benefits for using your local option, consider that one first, if not, you’re free to look elsewhere.

As the world changes, you may want to take that $600,000 and say “Here, start a company.”

So here’s Stash Wealth’s POV on saving for college with a college savings account. Don’t fully fund your child’s education with a 529 account. There are several reasons for this. The biggest factor is that the money you put into these accounts can only be used to pay for higher education expenses, unless you want to lose some of your investment. There is a 10% tax penalty to take it out of the account for any other reason.

 

There’s a lot of talk these days about the possible drop in college prices. That’s right, we are talking about school getting cheaper, and so are some major publications. Enrollment just isn’t keeping up with tuition hikes, so some schools are turning to lowering tuition to attract students. If this trend continues, it could mean that you’ve saved too much for your kids’ school expenses, and you don’t want to get hit with that penalty if so.

 

Get this! Assuming you’re planning to save for 4 years of tuition at a private university, costing around $50,000 per year – you’ll need to prepare to shell out over $600,000 (in future dollars)!* And that’s before you pay to get someone to take the SATs for them! #kidding #sortof And as the world changes, you may want to take that $600,000 and say “Here, start a company.” College just might not be worth that hefty price tag.

 

If you are just starting to have kids, or considering kids in the near future, let’s be honest, we have no idea what the academic world will look like by the time they are ready to go to college. Non-traditional college programs like coding bootcamps and programs offered at places like General Assembly are putting pressure on colleges as the “best” option to guarantee career success.

 

There is no doubt the student loan situation is out of control. Schools may be forced to lower tuition costs as prospective students forgo loans with higher and higher interest rates. Speaking of which, if you are still dealing with your college loans (hello, most of us Millennials), it might be a good time to consider refinancing. It can be pretty simple these days, and in some circumstances, save you a significant amount of money.

 

You may have heard the media rumblings about private schools, 529 plans, and the new tax code. Basically, the new tax code has stated that money in 529 accounts can be used to pay for private school (up to certain annual limits), but not all states are abiding by the federal decision. So make sure to check how your state is handling the ruling.

 

When it comes down to it, college savings accounts are a great way to save for your kid’s future education, but they should be one way of many. Consider the possibility that your kids may not want to go to college, or that they may be little tech geniuses who start the next Facebook out of your basement, with a helpful loan from you. Diversifying your savings options a bit to support the diverse and unknown possibilities of their future is a good way to go.

 

*For illustration purposes only. Projection assumes a 6% inflation rate. Please consults a financial and tax professional to understand how best to save for your college savings goals.