You can’t turn around this time of year without seeing caps and gowns all over the place – even on TV. My own alma mater, Meredith College, was recently featured on CBS for its 2007 Commencement.
All of this news about graduation and college makes me think about my own children – and how I am going to manage their tuition. It is a bit scary for me because, as you know, I am still paying off my own tuition. I feel strongly that I do not want my children to have that burden after their own graduations.
College is expensive. And it’s not becoming more affordable by any stretch of the imagination. In my home state of Pennsylvania, the average cost of college for a four-year public college is approximately $15,000 per year. The cost of a four-year private college approaches $30,000 per year.
I assume, with my kids, I’ll land somewhere in the middle.
I have three kids. At $22,500 per year (splitting the averages) for four years for three kids, that’s nearly $300,000 – not taking into consideration increases in the cost of living or tuition increases, etc. And you will notice that I am not even mentioning graduate school… I joke that my youngest child, Charlie, best earn a football scholarship.
Or maybe there’s a better way.
All of the fifty states – and the District of Columbia – now have a college tuition savings program, the so-called 529 plan. It’s called a 529 plan for the section of the Tax Code which authorized the plans. They are also known as “qualified tuition plans” and are state-specific.
There are a couple of variations on a theme – the pre-paid tuition plans and the college savings plans. While you can check out the differences in the plans for yourself, here’s what you need to know for tax purposes: the earnings in 529 plans are not taxable for federal purposes! Investments in the plans grow tax-free and are never federally taxable so so long as you use withdrawals from the investments for eligible college expenses, which includes most costs associated with college like tuition and room and board. However, if you withdraw money from the plan for a purpose other than college, you will be subject to federal income tax and an additional 10% federal tax penalty on earnings.
The other tax benefit to look for? Many states – like my state of Pennsylvania – offer state income tax benefits, for investing in a 529 plan sponsored by your state of residence. In some states, you are eligible for the deduction regardless of where the plan is located – check your state rules to be sure. Additionally, there may be state income tax consequences associated with moving plans, so read the rules carefully.
A good resource for finding out what your choices can be found at savingforcollege.com.
Armed with all of this info, I decided to set up plans for all three children earlier this year. It cost me only $25 per account to set up online. The minimum contribution? Not the thousands that I feared. My minimum contribution to open each account was $25 with no requirements for future auto-debit or monthly contributions.
This was great news for me personally. I was absolutely sure that I’d have to commit to regular forced savings. I know that financial planners are all gripping their chests in horror right now and thinking how terrible I am for not making a commitment to deposit the $1800 per month (yes, that what the college calculator recommended) into the account. But I refuse to be intimidated. I would love to be able to hand my children as much money for college tuition as I possibly can. But I’m not going to bankrupt their lives now in order to plan for later. I want my children to be able to take vacations, to go to museums, to eat out at restaurants without giving me a panic attack about college costs. It’s a huge expense but I also think it’s important to be realistic.
With that in mind, I looked into additional ways to grow these 529 plans. For one, I’ve notified my family. I have three children under the age of five. They don’t need expensive presents for birthdays – a card or a balloon make them just as happy. But my parents and in-laws want to do something. So I’ve suggested that if they really want to do something, why not stash away a few dollars into their 529 plans? And if the checks are written out to the plan directly and not to the child, there may be tax savings to the gift giver (referred to in the tax world as the donor)… Again, check with your specific state for details.
Another way to grow the accounts is to leverage them with a company that will contribute to the plan when you do certain things – like buy products, use their credit cards, etc. I use Upromise. It’s a great way to save for college without actually taking any money out of your own pocket.
Here’s how it works: as the parent, you create an account and you designate your student beneficiaries. To start saving, you can link credit cards and grocery/drugstore cards (mine include Genuardis and CVS) to your account. Whenever you buy certain products, shop at participating stores, or eat at restaurants in the program, the company associated with that product makes a contribution to your account, which can be linked to your 529 plans. That’s right, companies that sell products or services that you use anyway give you money back. Cool, right?
Is it loads of money? Of course not. Well, not if you shop like me anyway. But it’s a start. And remember, every little bit counts. In just a few short months, I’ve added almost $10 to my account – for doing things the way that I always have. That’s $10 that will grow, over the next twenty years, tax-free, for college.
You can ask your friends and family to help you save by linking their own cards to your beneficiaries’ accounts. Armed with this info, I sent an email to my parents and in-laws asking them to participate. My dad already signed up (hey dad, some money already showed up in the account, thanks!). And the thing about my dad is that he enjoys a Coca-Cola. Really. In a big way. And Coca-Cola just happens to be one of the participating companies. I’m thinking, if all goes well, Katie’s freshman English class will be paid off in a few years just based on my dad’s Coca-Cola habit…
So, I’m making some inroads into this tuition thing. You shouldn’t be intimidated or scared off into setting up plans of your own. There are tangible benefits (money put away from college), tax benefits (tax-free growth, possible state tax deductions) and, of course, the warm fuzzies that you get knowing that someday, you’ll be at your child’s graduation…
(And psst, if you’ve read through this whole thing and thought that it doesn’t apply to you because you don’t have kids, you’re wrong. UPromise also allows you to set up an account to pay down your own student loans – or make a contribution to your local schools. In the interest of disclosure, I will say that I don’t do product placement on my blog and UPromise has not given me anything in exchange for this post – in fact, they probably don’t even know that it exists. I just think it’s a great program.)
They don’t know it yet, but they are all going to school in Germany, where it’s cheaper.
They’d better get with the program and start learning the language …