College Savings Just Got Smarter
As State Treasurer and a father of two, I've always believed that 529 college savings plans can be a smart way for Delaware families to save money for college. And now these plans have become even better investments.
That's because recent legislation, the Pension Protection Act, made permanent the most important and compelling feature of 529 college savings plans: the ability to withdraw money to pay for qualified higher education expenses without paying federal income taxes. This benefit was previously scheduled to expire at the end of 2010.
Now, investors are assured of federal income tax-free distributions over the life of the investment whenever they use the money to pay for qualified higher education expenses, including tuition, room and board, textbooks and more. (And since Delaware tax law "piggybacks" the federal law, qualified distributions are also free of state income taxes.)
The tax benefit of a 529 plan can offer an advantage compared to other savings options. For instance, if a parent saves for college via such taxable alternatives as certificates of deposits (CDs), stocks or a traditional bank savings account, the earnings of those investments may be taxed by as much as 30%.
That means investors may receive only $70 of every $100 earned in a taxable account. Investors who take qualified distributions from 529 college savings plans, on the other hand, keep $100 of every $100 earned, which could amount to thousands of dollars in additional savings over time.
Increasingly, parents and financial advisors are recognizing the value of 529 plans as a cornerstone of their college saving strategy. In fact, 529 plans are one of the fastest growing savings vehicles in the industry. Over the last three years, the number of Delaware 529 plan accounts has increased by 48.7%.
Today, 93% of Delaware parents say they expect to pay for at least some of their children's college expenses. Yet of that number, 53% have not started saving. The size of a college savings goal and the relatively short time to invest before the money is needed underscores the importance of enrolling - and enrolling early - in a dedicated college savings account so that parents can give their children a head start on a college degree.
Assuming a 7 percent annual return, a monthly contribution of $250 in a tax-deferred account beginning at birth will compound to more than $105,000 by a child's 18th birthday. But, if parents wait until their child turns age 8 to start college saving, they would need to set aside $575 per month to reach $100,000 by the time the child turns 18.
Another very attractive element of 529 plans is that anyone can set up an account for a child - moms and dads, grandmothers and grandfathers, uncles and aunts.
By starting early and saving regularly, parents can help their children avoid a significant debt burden upon graduation. A recent state-by-state study, for instance, showed that Delaware students graduate with an average of more than $14,700 in student loans. By helping their child graduate with as little debt as possible, parents may better position them to take full advantage of any 401(k) type workplace savings plans available at their first job.
Consider the following scenario: If a student graduated today with $27,000 in student loan debt - roughly the average price for one year at a private college - it would cost $310 per month at today's interest rates (about 7 percent on average) for the next 10 years to pay off the loan. But if that same student graduated debt-free and put the $310 per month in a workplace 401(k) plan each month for 10 years, he or she could add $54,000 to their retirement portfolio, assuming a compounded 7 percent return.
With the cost of college today - and the even higher expected cost in the future - some parents may wonder if a college degree is really worth it. According to statistics, the answer is a resounding "Yes." A college degree is more valuable than ever.
In 2004, American workers who graduated from four-year colleges had median annual earnings of roughly $51,500. In comparison, those with only a high school diploma earned a median of just $28,600. That's an earnings gap of around 80 percent. And according to the Census Bureau, college graduates will earn about $1 million more over their working career than those with just a high school diploma.
529 plans can be a win-win proposition for many families but time is of the essence. The key is to start early and put the power of compounding to work for you.
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State Treasurer Jack Markell is the Chairperson of the Delaware College Investment Plan, which is administered by Fidelity Investments, and provides professionally managed investments, high contribution limits, no income restrictions, and the ability for parents, guardians or grandparents to maintain control of an account specifically dedicated for college or accredited trade school expenses. The plan offers unlimited, complimentary planning and guidance services to participating families. To learn more about the new enhancements to the Delaware College Investment Plan or to set up an account, please call Fidelity at 800/343-3548 or visit www.fidelity.com/delaware.
