When you have young kids, there’s a million things to do and plan, and that’s just to get through the week. So, it’s no surprise that something like college isn’t always top of mind, but maybe it should be.
Steve Taylor, a Certified Financial Planner with Merited Wealth, discusses the advantages of saving for college with young children, the major benefits of saving early, and the options that give parents flexibility when you’re not sure what the future holds.
What are the advantages?
“It’s really a great opportunity for parents,” says Steve. “The earlier you can address [saving] and set up a plan, the benefits just compound over time.”
This is certainly true for the two types of 529 plans: savings and prepaid. With traditional 529 savings, more time could mean greater opportunity to grow your investments. And for families exploring prepaid plans, it’s better to lock in tuition rates early.
Regardless of whether you choose a 529 plan or something else, “The sooner you can choose which route you want to go, the better,” says Steve.
How should families compare 529 plans?
When families search college savings, 529 plans are going to pop up. So, it’s important to keep in mind that most 529 plans, both savings and prepaid, are sponsored by individual states with different residency requirements.
Steve uses prepaid plans as an example. You can look at a state-sponsored prepaid plan “So long as you’re purchasing the plan in the state for which you’re pretty certain that your child is going to go to college.”
He mentions that with Private College 529 Plan, “It doesn’t matter [where you live]. It’s not state specific, it’s school specific.”
For 529 savings plans, most states will allow anyone to save in their plan. But before choosing a plan, Steve recommends researching whether your state offers an income tax deduction or credit for contributing to your own state’s 529.
What happens if a child doesn’t go to college?
Steve reassures families, “There are ways the money can be used.”
Looking at just 529 savings plans, Steve explains how a family can use up to $10,000 from their child’s account per year for K-12 expenses. 529 funds can also be used with many gap year programs, which provide students educational opportunities between high school and college.
For both savings and prepaid plans, families can always transfer funds from one child to another, called the change of beneficiary rule. And thanks to recent legislation, account owners can roll any unused 529 funds into a Roth IRA for their beneficiary’s retirement.
For super savers, Steve emphasis the importance of diversifying your college savings, “It does not all have to be in a 529.”
What’s preventing families from saving early?
In Steve’s experience, many families put off saving for college with young children because they don’t know whether their kids will go the public or private route – so they never talk about it.
“I think it’s a lack of discussion,” says Steve.
Even if a family isn’t 100% sure, or doesn’t have the means to save right now, they should still discuss what type of education is most important to them. That’s the first step to coming up with a plan so you can start saving. In the end, you want to save more and borrow less.
