Children grow up fast, and the cost of a college education keeps growing too. Fortunately, 529 plans provide a great way to start saving for the expenses associated with a college education.
According to College Board, over the decade from 2000 through 2010, the cost of going to college increased an average of 5.6% above the annual rate of inflation. With the rapidly rising cost of a college education, the key to having adequate funds in a 529 plan is to start saving early.
The first step to creating a sound savings plan is determining the future cost of a college education. This would include tuition, fees, room and board. One of the simplest ways to estimate the future cost of college is by projecting today's costs using historical data.
The following table demonstrates the possible future costs of a four year education at both a public and private university:
|Current Age||Public College||Private College|
The above example uses information from College Board's 2015 / 2016 survey published in November 2015. This study found the average annual cost of a four year public education was $19,548, while the cost of a four year private college education was $43,921.
The numbers projected in the above table assume the cost of college rises at an annual rate of 3.5%. It's possible to run through some additional scenarios using the online calculators found on this website
Once an estimate of college costs is calculated, the next step in the process is to determine how much money to set aside each month to meet the funding goal for a 529 plan. Once again, the table below is being offered as a guide. Keep in mind these are hypothetical examples, and the actual cost of college and / or the return on investment may vary from this example, resulting in an over or under funding of the account.
|College Savings Goal|
The way to read this table is fairly straightforward. For example, let's assume Cindy is six years old, and her parents want to plan for four years at a private college. The future college cost estimate table tells us those costs will be around $280,000. Using the monthly savings target table above, find the column for $300,000 and look across from age six. In this example, the target savings is $1247 per month into a 529 account.
Note: The above table uses an 8% return on investment as an assumption. It's possible to run through various scenarios using the College Funds Calculator found on this website.
All earnings, or growth of a plan, are exempt from federal, and sometimes state, income tax as long as the money is used to pay for eligible college expenses. This is an extremely important feature of 529 college savings plans as demonstrated in the following table:
|Taxable Account||Tax Free Account|
This third example demonstrates what happens to a $10,000 investment over an 18 year time period. By the 18th year, there is a $15,055 difference in value between the two account types; the tax-free return provides 60% more funds.
About the Author - Funding a 529 Plan (Last Reviewed on February 13, 2017)