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College Is Expensive!

Have you seen what's happening to college costs!? It's crazy to think about what I got away with - and that was only (already!) 12 years ago. For the school year that just finished up, the average cost for the year was $9,650 for state residents at public colleges, $24,930 for out-of-state residents going to public colleges, and $33,480 for private colleges!

Students these days seem to be getting more post-graduate degrees, too. So on top of the added cost per year, they've got more years to pay for. Graduates are graduating with mountains of student loan debt these days, some with little hope of ever paying it off. So what are students and parents supposed to do?

Is College Right?

If you're a parent worried about college costs (or even if you're not worried), the first thing you could try is to have a conversation with your children about whether or not college is even the right choice, especially before spending tens of thousands of dollars, or sometimes six-figures! There are more and more jobs that are service-oriented now that don't require college degrees. Some may require technical or trade school but many of them pay very high salaries - and by forgoing college your child will get four to five more years of earnings when compared to those to spend that time in school.

There is no shame in not going to college. Here is a clip of Mike Rowe (host of Dirty Jobs) talking about the opportunity cost of college.

How To Pay For It?

Once you have determined that college is the right choice (keeping in mind that many students who start college don't finish), how do you pay for it? The most efficient answer, unfortunately, is pretty boring - save.

529 Plans

There are a few different vehicles that can be used to fund college savings, but the most efficient and most used is the 529 plan. Like many other plans, 529 comes from the IRS code and we're not very clever when it comes to naming account types.

A 529 is kind of like a Roth IRA, but for college instead of retirement. Here are some features:

  • You (or anyone - parents, grandparents, relatives) can put money into a 529 plan

  • 529 money gets to grow tax free

  • Each state offers their version of a 529 plan

  • You can open a 529 with any state

  • The investments you get to choose from are restricted to those offered by each state

  • The beneficiary (the person who will be going to school) can be changed at any time

  • These assets aren't treated as your child's assets for financial aid purposes

Which State's Plan?

When deciding which state to use, look for plans that offer investment options that allow for global diversification (e.g. a wide range of investments). I prefer those that are passively managed. Look for low cost mutual funds within the offerings (those with low expense ratios).

When considering whether or not to use your state's plan or the plan of a different state, look at whether you get a tax benefit.

If your state has no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming), then you don't pay state tax anyway and you get no extra benefit from using your own state's plan and you can open any 529 plan.

If you live in California, Delaware, Hawaii, Kentucky, Maine, New Jersey, or North Carolina, then you don't get a state deduction even for opening an account with your home state. Therefore you are free to open any state's 529.

Some states give you a tax benefit no matter which 529 you open, including Minnesota, where I live (this is awesome). So if you live in Arizona, Kansas, Minnesota, Missouri, Montana, or Pennsylvania, then you, too, are free to open any state's 529.

If you live in one of the states not mentioned, then your state gives you a deduction only for opening their 529 plan. There is more work involved because you have to weigh the benefit of the state deduction against the costs of the 529 and the investments that are available to you.

I don't know your specific situation, but I tend to prefer the Utah plan if it makes sense to open another state's 529 (unless, of course, you are a Utah resident...then this is your home state). Utah's fees are low and they offer a great offering of low-cost investments.

Biggest Impact...Time!

The best advice out there is to save, and start early! You can even get more than 18 years of investment growth if you know you'll have kids but haven't had them yet. Start saving now and you can make the huge cost of college easier to manage.

There are many reasons to save for college using a 529 plan, but of course, there are reasons that it may not make sense. Take a look at whether it makes sense to go to college, which colleges make sense, how much you're able to save, how long until you'll need the money, and how much schooling your child is likely to pursue. By planning early, you can ease this burden.



About the Author

Derek Hagen, CFA, CFP, FBS, CFT-I, CIPM is a speaker, writer, and coach specializing in financial psychology, meaning and valued living, resilience, and mindfulness.


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