Saving for College – The Basics
By Nicole Young on June 17, 2022
Summer is officially here – filled with barbeques, pool-time, vacation, and a countdown to the first day of school. Before we know it, those tuition bills will be due, and/or we’ll be one year closer to paying for college. Nationally, the cost of college has been steadily increasing by more than 7% per year over the past decade. According to the University of Illinois at Urbana-Champaign, the cost for an Illinois resident is expected to range between $31,058 and $36,244 for the 2022 – 2023 school year (Including tuition, room and board, books, and fees). Growing at 7% per year, this same education is projected to cost between $61,000 and 71,000 in ten years.
A large part of our Financial Planning process is focused on Education Funding. One of the tools available to us is the 529 College Savings Plan. Here are some of the recent questions we’ve received from clients on saving for college:
Why Save for College via a 529 Plan?
The primary purpose of investing in a 529 Plan is the tax benefit. Earnings grow tax-deferred in the account and may be withdrawn tax-free to pay for qualified education expenses (i.e. tuition, fees, room & board, computer, etc.).
What if my child doesn’t go to college or doesn’t need all the money?
You have a few options if you find yourself with excess funds in a 529 account. 1) Transfer the excess funds to someone else in your immediate family to be used for qualified education expenses, 2) continue to hold the account to be used for future children or grandchildren, and 3) you may withdraw the funds for non-qualified purposes. For non-qualified withdrawals, the earnings portion will be subject to federal and state taxes, as well as a 10% penalty. Your original contributions will not be taxed or penalized.
What if my child is awarded a scholarship?
You may withdraw funds equal to the scholarship and avoid the 10% penalty. You would, however, be subject to income taxes on the earnings.
Which 529 Plan Should I Choose?
Each State will typically sponsor its own 529 Plan. In Illinois, we have three options to choose from; 1) Bright Start College Savings Program, 2) College Illinois Prepaid Tuition Program, and 3) Bright Directions College Savings Program. You may choose to contribute to any of these plans, or any other state’s plan. However, contributions to an Illinois plan are state tax deductible up to $10,000 ($20,000 for married couples).
How much should I save each month?
Using the original example above, and assuming you have 10 years to save for college, you would need to save roughly $1,000 per month to meet that goal. The most important variable in this equation is college choice. Out-of-state public schools and private schools will carry larger price tags. However, the earlier you start saving, the less you need to save each month.
With the cost of college education increasing at such a rapid rate, saving early has never been more important. For additional questions, please e-mail Randy at RPorzel@myprivatevista.com.
Article By: Randy Porzel, CFP®, RICP®: Randy is a Partner and Lead Advisor at Private Vista LLC. He began his financial planning career as an intern and worked his way up through every job at the firm. Randy finds joy in taking clients through Private Vista’s planning process, using tools that answer questions and clear uncertainty so that clients can look forward to their idea of an enriched life. In his free time, Randy enjoys serving on the boards for the Chicago Lighthouse for the Blind and The Darien Lions Club, whose mission is to serve those in the community with visual impairments.