It should come as no surprise that college tuition costs are rising, but the extent to which these costs are outpacing inflation can be alarming.
In the past 30 years, the average cost of tuition at public four-year institutions has more than tripled. And this doesn’t even account for costs of housing, books, meals, etc. If the trend continues, by 2035, a degree from a four-year public college could cost nearly a quarter of a million dollars.
So, it's understandable if figuring out how to pay for it all feels overwhelming. For some, scholarships or grants will help ease the burden, but the largest percentage of the population will have to rely on savings and student loans.
The good news is, you have tools at your disposal for making the most of your college savings.
College savings plan
A 529 plan (named after Section 529 of the Internal Revenue Code) is a savings vehicle with tax and financial aid benefits. Parents will want to gauge their risk tolerance, as the money you deposit into a 529 is generally invested in large mutual funds (think 401k or an IRA).
"Fortunately," said Josh Lusby, CFP®, Investment Advisor for SELCO Investment & Retirement Services, available through CUSO Financial Services, LP,* "the funds can be invested in low-maintenance, target-date type of funds that will be more aggressive in their allocation the younger an individual is, and will moderate in risk as the child gets closer to the age of using the money.”
Earnings are tax-deferred and distributions tax-free as long as they’re used for college expenses. (Note: In some states, the 529 plan has been enhanced to allow tax-free withdrawals to help pay for tuition at private K–12 institutions.) And if college ends up not being in the cards for your child, the account can be transferred to another eligible family member.
Keep in mind, contributions to a 529 plan can reduce the amount of financial aid your child is eligible to receive.
What can you use a 529 for? Here are a few items that qualify:
- Tuition and fees
- Room and board
- Books and other supplies
Be sure to speak with a tax professional about potential advantages/disadvantages of opening a 529 account.
Certificates of deposit / college certificates
If you’re reluctant to take risks while saving for your child’s education, a certificate of deposit (CD) could be the route for you. CDs (known as certificates at credit unions) are about as safe as it gets—CDs along with other account balances are insured by the NCUA (credit unions) or FDIC (banks) for up to $250,000. With that safety net in place, you can lock in to a fixed-rate CD and watch it gradually earn over the years.
If you’re willing to take some risk, another method would be to reinvest all the money you earn through a 529 or other high-risk investment plan. You can transfer those funds into a CD and let them safely earn until your child heads to college. SELCO’s College Savings Certificate requires only a $100 deposit and, unlike most CDs, you can make unlimited contributions as long as they’re $50 or more.
“CDs can be restrictive in some ways, but this can be used to your benefit,” said Kent Hancock, SELCO’s Branch Operations Manager. “You can’t withdraw without a penalty, which forces you to think before locking the funds up and spending them frivolously.”
Whatever savings option you choose, it’s a good idea to start early. Even if tuition increases slow down, you’ll still be looking at a hefty sum years from now. At that time, you’ll be glad you had money socked away to help pay for your child’s education. Every little bit counts.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk, including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Investors should carefully consider the investment objectives, risk, charges, and expenses associated with 529 plans before investing. Specific information is available in each plan’s official statement. Keep in mind that there is the risk that 529 plan investments may not perform well enough to cover costs as anticipated. Also consider whether your state offers any 529 plan state tax benefits and whether they are contingent on joining your own state’s 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.