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The 529 plan: Best-Kept Secret for Making College More Affordable

George Chamberlin | 5/29/2015 10:50 a.m.
Each year the National Association of Student Financial Aid Administrators and other groups use May 29 to education students and families about the various methods of paying for a college education. One tool, of course, is the 529 college savings plan.

Each year the National Association of Student Financial Aid Administrators and other groups use May 29 to education students and families about the various methods of paying for a college education.

One tool, of course, is the 529 college savings plan.

Rather than borrow to pay for college, the 529 plan is an alternative allowing families to save money in tax-deferred accounts and, if the money is ultimately used to pay college expenses, the growth will be tax-free. Despite the obvious benefit, nearly 70 percent of Americans have no idea a 529 plan is for college savings and participation in these investment accounts has actually declined in the past three years. “It seems counterintuitive that the costs of higher education continue to rise while awareness for a vehicle that can make this cost more manageable continues to decline,” said Greg Dosmann of Edward Jones, which just released the results of its annual 529 Plan Awareness Survey.

“…if the money is ultimately used to pay college expenses, the growth will be tax-free.”

It has been widely reported that student debt has now topped $1 trillion and more money is owed on education loans than on credit card debt. The most recent report from the Project on Student Debt finds 69 percent of graduating seniors in 2013 at public and nonprofit colleges had student loans with an average balance of $28,400. It might be surprising to learn only New Mexico has a lower average debt on student loans than California. Here the average loan balance is $20,340 compared to New Hampshire with the highest amount owed of $32,795.

Among the local public colleges, the average debt for a 2013 graduate at the University of California San Diego was $21,653 with 59 percent of graduates in debt. At San Diego State University the average loan balance was just $18,100 and only 48 percent of graduates carried loans. At private schools, 51 percent of 2013 graduates at the University of San Diego had an average loan debt of $29,115.

Using a 529 plan to save money to cover some of those costs can significantly reduce the amount of money needed to purchase an education. These plans are available through state-operated programs like the ScholarShare plan in California. They offer a variety of investment programs designed to maximize growth in early years and be more conservative the closer college becomes. However, a survey by Sallie Mae finds most parents with college-bound children have set aside only about ten percent of the money needed to pay for the education.

“…most parents with college-bound children have set aside only about ten percent of the money needed to pay for the education.”

“Saving for college is of course about dollars and cents, and oftentimes the hardest part is getting started. Setting reasonable goals can help parents foster their own commitment to saving for college, whether it be working to accumulate an actual dollar amount, setting aside a certain amount of money at a specified frequency or simply developing the habit of not dipping into college savings for other purposes. And those who do are far more successful,” said Charlie Rocha, Executive Vice President of Sallie Mae.

Bottom line, debt associated with an investment in college is significantly different than credit card loans. Rather than being a burden, it may be a path to future fortunes.

Learn more about opening a 529 college savings plat at sdccu.com/CollegeSavings.

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