Each year for our birthdays, my siblings and I were very disappointed to receive a card and an orange piece of paper from my grandparents. We would hand the orange piece of paper over to my dad, never to be seen again and it didn’t feel like much of a present at the time. But it was those many orange pieces of paper, and some smart investment decisions by my financially-wise father, that allowed me to graduate from college with no student loan debt. I am incredibly grateful to my parents and grandparents–it has truly been the gift that kept on giving.
While the cost of things like baby gear, birthday parties, and ballet lessons is stressful, thinking about the cost of college is beyond overwhelming. And it’s a cost with a seemingly endless cap. Davis Brister, a Senior Financial Advisor at Merrill Lynch, says, “One of the biggest challenges is the rising cost of education. According to several websites, including www.finaid.org and collegeboard.com, the average cost of college could rise by as much as 6 percent or more annually in the coming years, exceeding the rate of inflation.” This is a nationwide issue but The Institute for College Access & Success (TICAS) reports that in the State of Louisiana alone, the percentage of college graduates with student loan debt is 51%, with those debts averaging $26,865.
There are of course many private and public loan options, and having some debt can certainly give a good lesson in personal responsibility to help your kids appreciate their higher education, but taking on too much debt can negatively impact your child’s credit score, limit the possibility of graduate school loans, and be an overwhelming sum for an entry level salary. There are, however, some investment tools out there that can help you contribute substantially to your kid’s college education.
There are various savings plan for minors, but according to Brister “Section 529 plans are generally treated more favorably for federal financial aid purposes than other savings vehicles.” If you are working with a financial advisor, he or she can tell you more about different 529 plan options. Each state in the U.S. offers its own plan which normally has some kind of residency requirements. Louisiana’s is known as “START”, and its residency requirements include that either the account owner or the beneficiary reside in Louisiana.
Benefits of 529 Savings Accounts in Louisiana:
–The State of Louisiana will match a percentage of the deposits made into the account each year (up to 14%) depending on the adjusted gross income of the account owner for the previous year. This is called an “Earnings Enhancement.”
–Account owners may take a tax deduction for deposits made into the account (up to $2,400 per beneficiary each year for a single account owner and up to $4,800 for account owners filing a joint return).
–There are no taxes on earnings in a 529 plan when the account is used towards Qualified Higher Education Expenses.
-As the START website reports, SavingForCollege.com ranks Louisiana’s START Savings Program first for 10-year performance among all 529 plans in America. START was also ranked among the Top 10 State 529 plans for 1-year, 3-year and 5-year performance.
One of the greatest gifts you can give yourself and your child is to start saving and investing early. “Two advantages for saving early for college would be time horizon and compound interest. The longer time period an investment has to grow, the better chances for success. It usually takes more money if someone starts saving too close to college, thus giving the investments in the plan less time to grow and earn compound interest,” shares Brister.
But most parents may already be on a tight budget after the rising costs resulting from the birth of their little bundle of joy–daycare, diapers, doctor visits–so many more demands on each dollar. It can be difficult to squeeze out that extra coin for college when it seems so far off. Brister suggests, “Get your family involved! For grandparents, an education funding strategy can help instill the value of education in your grandchildren. It also can remove significant assets from their estate, and may reduce federal estate taxes, while allowing them to retain control of those assets. Before making any decisions, however, please consult your tax advisor.” Anyone can contribute to your child’s 529 plan and the pay-off will last a lot longer than any new toys or clothes that will quickly be tossed aside as they grow up.
Who knows how high costs will climb or what debt and savings vehicles will be available by the time your tot is in her teens. By enrolling in a savings plan now, regardless of how much you can afford to contribute, you are showing your child that your value her education. And one day, she will be grateful for all of the birthdays when you handed her those mysterious but priceless pieces of paper.