Market Beat: College savings plans
February 4, 2019
A college education is very important these days to obtain a good job. Tuition is also very expensive and has risen substantially over the last 30 years. Many college students use student loans to get through school and graduate with a tremendous debt load.
The average student loan debt for recent college graduates is over $35,000. Nationally, cumulative student loan debt is over $1.4 trillion dollars, and there are over 40 million people nationwide that are encumbered by that debt. It is a significant problem today.
According to an article by CNBC, annual tuition at public colleges averaged $9,970 for the 2017-2018 school year. In 1987-1988 it was $3,190, that's an increase of 213 percent. Private schools are more expensive. The average annual tuition at private colleges was $34,740 for the same school year as above and in 1987-1988 it was $15,160, an increase of 129 percent.
That means that four years of tuition cost at a public school will be almost $40,000 and that's if the student graduates in four years. Many students take about five years to graduate and tuition isn't the only cost, you also must add room and board, books, computers, and other supplies.
One of the best ways to help students save for college is through 529 college savings plans. They were established in 1996 and are treated like Roth IRAs for tax purposes. The funds that are contributed to the plan are after tax dollars, then they grow tax free and the distributions are not taxable if the money is used for qualified higher education expense.
There are basically two types of plans, pre-paid tuition plans and college savings plans. Each state has it own plan and there are some slight differences from state to state. Pre-paid tuition plans are meant to be used at the specific college you select when the plan is established. College savings plans can be used at any college or university in the nation.
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A good way to help children or grandchildren get through college is to set up college savings plans when they are very young and give the money time to grow in the mutual fund type investments offered by the plans.
A change that is new for 2018 gives the owners of 529 college savings plans the ability to use them for K-12 private school tuition instead of having to wait for college, so they have even more flexibility.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.