According to the National Center for Education Statistics, the average cost of tuition, room and board for the 2010-11 academic year hit about $13,600 at the average public college and over $32,000 at the average private institution.
(Photo: David Aaron Troy, Getty Images)
by Jeff Reeves, Special for USA TODAY
- For 2010-11 year, average cost of tuition, room and board was $13,600 at public schools
- At private schools, the tab averaged $32,000
- A 529 plan is an investment account and gains are tax free
There's little that you can be sure of in this crazy economic environment, but one thing that seems certain is that most kids need a college degree to get ahead - and that their college degree is going to cost a pretty penny to obtain.
According to the National Center for Education Statistics, the average cost of tuition, room and board for the 2010-11 academic year hit about $13,600 at the average public college and over $32,000 at the average private institution. Even adjusted for inflation, that's roughly double the cost of public college in 1980 and triple the cost of a private school.
Seeing all those dollar signs can be intimidating even for a family that is reasonably secure in its finances. But don't fret: There are tools you can use to plan for your child's education and make sure college is within reach.
And one of the best tools out there is a 529 plan.
Here are the basic advantages:
• Tax-free profits. A 529 plan is an investment account. Gains on your 529 investments are tax-free and qualified withdrawals are taken tax free. Depending on circumstances, some contributions to the account can be tax deductible, too.
• Anyone can help anyone. You can contribute on behalf of any beneficiary, so 529s are a great way for extended family or friends to pitch in. You can save for yourself, a relative or neighbor.
• Transferrable to family. What if your son Jimmy doesn't go to college and use his 529 savings? Well, you can transfer that cash to his sister Suzy's account instead with no penalty - or even to Jimmy's spouse later in life or back to you as if you decide to go back to school.
• Use when you're ready.There is no time limit on when the funds in 529s need to be used.
Clearly, having a dedicated savings account that grow your money tax-free is a great thing. Even so, 529 plans are not one-size-fits-all.
For starters, there are dozens of plans available to you to pick from and they all have very different rules - from fees they charge, to the minimum contribution and to the cap on how much you can save in the plan. As with any financial product, you need to read the fine print and compare plans to get the best option for you.
And most importantly, because 529 programs are issued by states, there are frequently tax deductions available to you if you stay in-state with your college plan.
For instance, Maryland residents who use the state-sponsored Maryland College Investment Plan can deduct up to $2,500 on their state income taxes. Pennsylvania residents using the Pennsylvania 529 College Savings Program get a whopping $14,000 state income tax deduction. But Florida, which has no state income tax, subsequently has no break to offer in-state residents.
When you shop for a 529, take into account this tax angle because you may find it beneficial to stay in state for a big deduction. On the other hand, you may find there's no difference in picking a plan from Alaska or your home state and have the flexibility to look at a wider array of options.
The other issue with 529s is the that they come in two flavors - a regular college savings program or a "prepaid" tuition plan.
College savings plans are straightforward, allowing you to save and invest your cash like a 401k and apply them to anything education-related - including books and dining hall expenses - at any institution.
But prepaid plans are less flexible in exchange for locking in the price you'll pay for college; there are stricter standards for eligibility, a smaller list of in-state schools in which to send the beneficiary, and limits on spending that exclude some items like room and board. This lack of choice is the price you pay for the ability to lock in the cost of college.
And of course, keep in mind that 529 plans are not designed to save for retirement or for other expenses. You'll always be able to get some of your money back, but you'll take a 10% penalty on earnings if you tap the cash for a "non-qualified" use. Depending on your plan, you could also incur tax penalties at the state level, too.
There's some research necessary, but the bottom line is that if you care about your child's education, a 529 is a powerful option. Just make sure to do your homework and find the right college savings plan for you and your family.
• The SEC has a special publication, An Introduction to 529 Plans, to help you understand specifics of how 529s allow you to invest and save for college.
• The website SavingFor College.com has a lot of good resources and attacks 529s from a lot of different angles. There are a few helpful tools and calculators here to help you on your college savings journey.
• Getting to the nitty-gritty, the 529 Plan Center from independent investment research firm Morningstar allows you to compare expenses, tax benefits and more for each specific plan. There's an interactive map that allows you to click on your home state and easily compare what's available to you depending on where you live.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks.