In 2003, the U.S. Congress gave a nod to the importance - and cost - of higher education by declaring September to be College Savings Month. Originally conceived by the National Association of State Treasurers and the College Savings Network, the month is devoted to teaching families and their future students how to save wisely for what may be one of the biggest and most important investments in their lives.
Although college costs are climbing rapidly, the long-term benefits remain clear. Recent census data highlights the relationship between educational attainment and earning potential. In 2008, the average annual earnings of someone with a high school diploma were $31,283. That same year, average annual earnings for someone with a bachelor's or graduate degree were $58,613 and $83,144, respectively.
Yet as the economy struggles while tuition gets higher and higher, many families are starting to doubt the value of their college investment. For some parents, it's become a question of paying for their child's college or saving for their own retirement - and that's not a choice anyone wants to have to make. In order to help future generations protect themselves against this conflict while keeping their families educated, many states offer college savings education programs in September and year-round.
Much of College Savings Month events focus on 529 plans, which are named after Section 529 of the Internal Revenue Code. The 529 plan is a tax-advantaged (meaning tax-free or tax-deferred) investment plan that allows people to set aside money for a designated beneficiary, such as their child or grandchild. As long as the money is withdrawn for qualified education expenses - tuition, school fees, etc. - it's exempt from federal income tax. Many states also offer tax-free withdrawals and tax-deferred growth, but the specifics vary state to state because the plan is administered by state agencies.
Learn more about your state's 529 plan.
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Saving for College? Start at Birth
Just before College Savings Month, Fidelity, a large investment bank that provides 529 plans, released their fourth annual College Savings Indicator study. The study examines American parents' savings habits and payment plans for future college costs. They found, unsurprisingly, that the recession has had a real effect on families' ability to cover college costs. The good news is that more parents are saving for college - 67% have begun setting aside money for college, up from 58% in 2007. The bad news is that they're only projected to be able to meet 16% of college costs, down from 24% in 2007.
To help ease that gap (and, of course, promote their own college savings plans), Fidelity also released income-based guidelines for how much families should save in their 529 college savings plans. Although the guidelines are based on projected costs 18 years from now, assuming families are starting to save at their student's birth, they can be useful for any family starting to think long-term about college savings.
The company used data on college costs from the College Board to project what college expenses at public and private institutions will be in 18 years, with an assumed rate of 5.4% annual growth. Fidelity then used data from Sallie Mae to estimate (conservatively) how much aid in scholarships, grants and family gifts households might receive that are currently making $55,000, $75,000 or $100,000 annually. Finally, they estimated how much money families at each income level would have to save in order to cover college costs - if they put that money into a 529 plan with a return comparable to that which Fidelity estimates their age-based investment option would deliver.
Fidelity also cautions parents not to forget that money withdrawn from 529 plans can only go toward 'qualified expenses.' Most families will encounter other significant expenses when they send their children off to school, from transportation (flying back and forth across the country adds up!) to healthcare. They suggest that families expect to pay between $1,750 and $2,500 per year in nonqualified costs, which can be set aside in personal savings or brokerage accounts.
Catching Up to College Costs
Sallie Mae has also offered some college savings advice for those families who are a little farther along in their journeys. Although there are limits on individual annual contributions for 529 plans, they point out that friends and other family members can make gifts to college savings accounts. Some family members may also open a separate 529 plan on behalf of your growing student.
It's also worth checking with your employer to see if you can get even more tax savings out of your 529 plan. Some companies offer employees the opportunity to contribute to a 529 plan through ongoing payroll deduction, much like a health savings plan. Some employers don't offer this benefit simply because they don't know it exists, so be sure to educate your boss.
And, finally, 529 plans aren't the only college savings option. Many families use multiple savings or investment accounts to save for college. Low-risk options include FDIC-insured high-interest savings accounts and Certificates of Deposit.
Even if you can't afford to set aside $100-$400 a month, the message of College Savings Month is clear: Plan wisely, set aside whatever you can and you'll be able to offer your child the chance at a great education without a mountain of debt.