With the cost of college climbing faster than the rate of inflation, families need to have a plan to build savings to prepare for higher education.
But fewer Americans know about college-savings plans than last year, according to a survey by financial firm Edward Jones. ThinkAdviser reports that 1,000 adults polled earlier this month found that 70 percent of Americans do not know that 529 plans are a college savings tool. That number is up from 63 percent in 2012.
May 29th – or 5/29 – is a good day to figure out what the plans are and how they work. Reuters breaks it down simply: Introduced in 1996, 529s are savings plans where earnings are tax-free as long as they are used for college expenses. They are available through the states, but families can choose a plan that is not in the state where they reside.
Many families set up a savings plan with monthly automatic withdrawal. The power of compound interest allows the savings to grow as the child does. Even a small monthly contribution can add up over the years. And that money will come in handy. According to the Project on Student Debt, members of the Class of 2012 left school with an average of $29,000 in debt. In Minnesota, college graduates carried an average of $31,497 in debt.
An article in SouthernMinn.com points out that parents – or grandparents – don’t need to be rich to start a 529 plan. The minimum deposit is just $25.
"With the cost of college going up as quickly as it is, we’re hoping more people will start saving as soon as they can,” said Robert Stern, Program Manager for the Minnesota College Savings Plan.
Stern says it’s important to clear up some misinformation about 529 plans.
“There’s a misconception that students will hurt their chances of qualifying for financial aid if they have a college savings account. That is not true,” he said.
Some families begin saving for their child right away. Research by T. Rowe Price found that the triggering event most likely to get parents to sign up for a 529 is the birth of a child - not kindergarten, or entering middle school, or any other time.
"We get four times as many accounts open at birth than any other age," says Stuart Ritter, T. Rowe Price's senior financial planner.
Find out how to get started with a 529 plan at the Minnesota College Savings Plan website.