How to choose a 529 plan

The average fees for a four year private college in the USA in 2011-2012 was $28,500 according to the College Board. A 529 plan can ensure that your grandchildren will have a substantial, if not total contribution towards their college education. What’s more these fees are rising on average by 7% per annum.

In addition more students than ever are competing for financial aid. In fact 21 million families filled out the Free Application for Federal Student Aid (FAFSA) for the 2010-11 academic year. That is 49% up on two years ago.

Many states have actually reduced scholarships and made eligibility for financial aid tougher.

Student debt is soaring

You may have heard that President Obama has just reduced the maximum required payment on student loans to 10% per annum. Given that students took out loans of $100 billion in 2010 and the current outstanding debt for students is $1 trillion there is obviously a real problem.

According to the College Board two thirds of students with a bachelor’s degree have student loans and these loans range from an average debt of £24,000 to about 10% of undergraduates having loans of $40,000.

Having debt is fine if the student knows that when he leaves college he is going to be able to get a good job immediately, but as we all know good jobs are hard to come by these days.

So how can a 529 plan help your grandchildren?

May I suggest that next time you want to buy your grandchildren a present, instead of buying that geegaw that they have been pestering you for, you put the money in a 529 plan. Of course they will hate you now, but later when it comes to college they will thank you.

Parents, grandparents, aunts and uncles can all contribute to the 529 plan over the years. When the time comes for the child to go to college if he gets a full scholarship or for some reason decides not to go to college, the money can be passed to another child, or you can use it to send yourself through college.

But according to Matt Krantz of USA Today, a 529 plan is the most tax efficient way of saving for your grandchildren’s college education. Earnings within the funds grow tax free and withdrawals are also tax free as long as the money is used for qualified higher education expenses.

Can you be sure your 529 plan investment will grow?

Well no, 529 plans are invested in stocks and they have not performed well over the last ten years, but 5 year global government bonds have returned nearly 5% on average per annum over the last ten years.

Many 529 plans have added more conservative funds to their portfolio, but don’t be too conservative when the child is young, or the funds may not be sufficient.

Clearly when investing for a newborn your investments can be more aggressive. But most 529 plans have a recommended option to reduce the exposure, by investing in more conservative options as your child nears college.

But what other options do you have? If you put your money in a high-yield savings account right now the returns on these accounts have fallen to about 1%. Even if the returns rise to 2% the interest is subject to ordinary income tax rate. So the 529 plan is the most tax efficient way of providing for your grandchildren.

According to Laura Pavlenko Lutton editorial director for Morningstar’s Fund Research Group, plans have got cheaper and investment options have improved. Apparently many 529 plans had high costs and poor investment strategies, but in recent years the industry has matured and the investment choices have improved considerably.

So clearly you need to do your research, find a plan that suits you. Look at how old your grandchildren are, how many years will the plan run for and where are the best most flexible options.

The only thing that is definite, is that with the rising cost of college education, doing nothing is not an option. For more informtion and ideas come to www.grandmasdelights.com
Figures quoted from the College Board and Sandra Block and Matt Krantz of USA today

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