As we enter the thick of tax season, many of us have money on the mind. It’s a time to evaluate last year and set our financial course for this year and beyond. Something that may not always be top of mind for parents of young children is working college savings into that financial planning. In fact, many of us don’t start thinking about how to pay for college until the kids are already in middle school or even high school. By then, the prime saving years have already passed and we’re in catch-up mode.
The key to saving for college is to start early - some parents get started even before their child is born. Every dollar you put away today will offset future expenses and potential student loan debt. Projections show that by 2030 (about the time a newborn today will be entering college) the cost of four years of tuition at an in-state university could be over $160,000. Further, if the student uses loans to cover the bulk of the cost, the additional interest paid could push that number as high as $220,000!
But what’s the best way to save? What may first come to mind are traditional methods such as mutual funds, bonds and savings accounts. However, these options have limitations – standard mutual funds and savings accounts (and some bonds) incur taxes on the earnings, and bonds and savings accounts yield relatively small returns. The good news is that there are great investment vehicles specifically designed for college savings. They’ll help you put money away as you’re able, provide tax-advantages, and maximize your return on investment. Perhaps the most well-known of these are 529 plans.
A 529 plan is a college savings account featuring tax-free earnings and withdrawals when used to pay for qualified higher education expenses. These plans can be used at nearly any public or private university, community college or technical school in the country and even in some foreign countries. Most 529 plans have the potential to yield substantially higher returns than either bonds or standard savings accounts.
The Guaranteed Education Tuition (GET) Program is Washington’s 529 plan. It’s a prepaid tuition plan that is guaranteed by Washington state law to keep pace with rising tuition costs. The primary difference between GET and a traditional 529 savings plan is that a GET account yields steady growth. On the other hand, 529 savings plans work more like a mutual fund and are subject to the volatility of the stock market. GET is one of four state-sponsored prepaid tuition plans in the country that carry a full-faith guarantee. In our state, that means 100 units purchased today will pay for one year of resident, undergraduate tuition and fees at Washington’s highest-priced university, no matter how much future tuition increases.
An additional option you may have heard of is a Coverdell Educational Savings Account (ESA). Like GET, distributions from ESAs are tax-free when used for qualified educational expenses. However, contributions to a Coverdell account are limited to $2000 annually, and the payout value fluctuates like a 529 savings plan. Custodial accounts (i.e. UGMA or UTMA) are another option, but the money transfers to the student upon reaching the age of majority, and may negatively affect financial aid as a student asset.
GET accounts are generally considered an asset of the parent, and the account owner always retains control.
No matter your preferred savings method, the message remains the same: start early, put away what you can, and let your child know that you’re saving for their future. Children who have a college savings account in their name and know it are 6 times more likely to go to college than those who don’t!
GET is open to new enrollments through May 31. To take advantage of this year’s unit price, sign-up by May 31. Once enrolled, you can continue to purchase units at this year’s price through July 1. Enrolling is easy to do online at www.get.wa.gov. To stay current on the latest discussions, follow GET on Twitter and Facebook and check out the NEWS box on the lower right hand corner of the GET home page.
For details on how GET works visit www.get.wa.gov/howgetworks.shtml.