#529s

At Sewickley Academy, a private school in Pittsburgh, families have yet to ask about the changes to 529 plans. div > div.group > p:first-child”> While the Tax Cuts and Jobs Act is still very new, “my initial reaction is, I’m anxious to see how it plays out,” said Brendan Schneider, Sewickley’s direc… Personal Finance

The 404 Show 1,616: Jill Schlesinger, 529s are worth it, Google Photos, Fight Club 2 (podcast)

The front page of Sunday's Gainesville Sun included an article entitled, "Prepaid college plans: Yes or no?"

I get asked by clients all the time how to deal with saving for college, so I thought I'd make some comments on the article and offer a few bits of hopefully helpful knowledge. 

It's no secret that college tuition rises year after year -- often at a rate double inflation.  The article notes that the University of Florida's tuition has been rising 15 percent annually, which has caused prepaid plans to get a boost, as well. 

When considering college funding, just like any other element of personal finance, there's no one-size-fits-all approach.  Here are a few factors to consider in choosing how to save for college:

Goals for Saving - Questions to Ask Yourself

- Do you want to pay for all or part of college?

- Do you want to pay for just tuition, or also supplies, room, and board?

- How do you feel about student loans?

- Do you want your children to work during college?

Public vs. Private

Your next decision will have a huge impact on the dollar amount you need to save.  Do you want your kids to go anywhere for college -- Ivy League included -- or do you have a die hard Gator legacy to continue?

A year at Harvard will run you about $48k right now, compared to about $12k at UF.  At 6% inflation, that's $137k after 18 years for Harvard and $34k for UF. 

(Tip: Check out CNN Money's College Cost Finder to check out current tuition rates.)

Transferability and Tax Advantages

529s and Prepaid plans have similar tax treatment and transferability, but consider one scenario.  529s have tax-free growth when used for education expenses.  If Sally goes to a less expensive school than Johnny, the balance of her money can be transferred to Johnny's 529.  Prepaid plans have no such luck, because you're paying in advance for college.  You can transfer plans, but you will never overpay into the plan.  Does that make sense?

529s are Investments, Prepaid Plans are Insurance

Here's one way I like to explain this topic.  What's more important to you in discussing your kids' education: the assurance that they will have a paid for education, or flexibility and growth?

Many parents want to know that no matter what happens with state scholarships, financial aid, or private scholarships, their children will have a fully paid-for college education in Florida.  This peace of mind is well worth the risk that they could have gotten a better return in the market and given their children more choice.

On the other hand, for parents who have no particular desire for their kids to go to state schools, a 529 plan will offer more potential for growth and a greater ability to choose where to send the kids.  Keep in mind, though, that someone is going to have to manage those investments -- whether yourself or a financial adviser.  

Warning: Don't Forget About Retirement!

It's important to remember one thing when planning for your kids' education.  There are no scholarships or prepaid plans for retirement.  While we don't know the future, we do know a couple of things: people like to create endowments for scholarships, and 18-22 year-olds can get jobs!  When you're in your 70s and 80s, no one is going to give you a scholarship, and you may be completely unable to work.  Don't neglect your retirement for the sake of your kids' education!

Hopefully this has been helpful to some folks.  Let me know if I can help you in any way.

Cheers,