Cynthia Tait-Editor-Book Reviews-Interviews at Michigan Mama News
The cost of college has grown 8x faster than household income over the last 20 years. Many millennials and their parents were caught off guard with only minimal college savings and thus had to rely on loans to cover costs. Average student loan debt tripled over the last 15 years to $1.5 trillion. Because of their personal experience with debt, millennial parents are now much more likely to start saving early for their kids’ college expenses than previous generations. In fact, many are starting tax-free 529 College Savings Plans even before their child is born, says Jordan Lee, CEO of CollegeBacker.com, which helps families set up a college fund in just a few minutes and then invite family and friends to contribute. But all college plans are not equal, so Lee has some advice to make parents savvier about saving.
Summary: In order to get the most out of your college savings plan, CollegeBacker CEO Jordan Lee suggests you do a bit of research, start saving early, and then invite others to help your savings grow faster.
By Jordan Lee
- Myth #1: You have to invest in your own state’s 529 plan.
Fact: 529 plans are not all created equal, so it’s a good thing that you can choose the one that’s best for your family, but you don’t need to pick your state’s plan. What should you look out for? Many states partner with for-profit companies to offer so-called “advisor-sold plans,” which typically have higher fees that can take a significant bite out of your investment’s growth. On the positive side, 35 states offer additional tax incentives to save with a 529 plan, including 7 that offer these incentives even if you use a different state’s plan. Some states offer sign-up bonuses at certain times of the year. Among the best reviewed direct-sold plans are Utah, California, and New York.
- Myth #2: You need to hire a financial advisor to navigate the confusing landscape of 529 options.
Fact: Yes, the myriad of options can make the 529 landscape confusing, but with a little research (try Savingforcollege.com or CollegeBacker.com) you can figure out the best option for yourself.
- Myth #3: You have to do it all on your own.
Fact: Millennial parents, many of whom are saddled with their own college debt, have figured out that one of the best ways to save more for their kids’ future college costs is to turn to their circle of family and friends. Some states have added features to their websites to make it easier to receive savings gifts – or you can try CollegeBacker.com, where it takes just a few minutes to sign up for a 529 and invite family and friends to contribute at birthdays, holidays, and other special occasions.
- Myth #4: You should pay off all your other debts before you start saving for college.
Fact: While paying off college debt should be a priority, it usually makes financial sense to simultaneously pay off your debt and start saving for your kids while they’re still young. Average returns from stock investments are typically much higher than the interest you are paying on your student loans, and that’s not even taking into account the tax-free gains and state incentives you can get with a 529.
- Myth #5: Your college fund will negatively impact your child’s ability to qualify for financial aid.
Fact: Money saved in a parent-owned 529 only reduces a student’s aid package by up to 5.64% of the account’s value, a much more favorable tax treatment than if a grandparent or the student owned the account. Withdrawals from other savings vehicles, such as Roth IRAs, are counted as student income and are assessed at up to 50% of value when it comes time to determine a student’s financial aid package.
- Myth #6: I make too much money to qualify for a 529 Plan.
Fact: 529s are a lot more flexible than retirement accounts and other educational savings accounts and do not have any income limits. Contribution limits are set by the states and can be as high as $485,000.
For more information, check out www.collegebacker.com