A common fear we hear over and over here at Financial Evolution Group is, “I’m worried that I will still be paying my student loans when it’s time to send my kids to college.” If you’ve ever had this fear there is a simple way to eliminate it from your life and restore your peace of mind, by setting up and then supercharging a 529 college savings plan for your children.
What is the challenge?
We understand the problem, with student loan payments taking up such a large portion of your monthly income there is a big challenge in finding the money to pay bills, loans, save for your retirement and college for your kids. As a result, most families end up sacrificing one or several goals in order to meet another.
Here is a typical scenario, a family plans to save $250 per month for their children’s college educations but they owe $130,000 on their own student loans. Paying minimum payments on the loans for 30 years at an average 6% interest rate, they would end up paying $150,586.86 in interest. To calculate your own pay-off schedule visit this loan calculator.
If they applied that same $250 per month to their own student loan balances in addition to their minimum payments, they could shave 13.3 years off the time required to pay-off their student loans and save themselves $74,575 in interest payments.
Enter the 529 plan
State sponsored college savings plans are a great way to help you save for your children’s college education without sacrificing your own student loan pay-off schedule. These plans are more commonly known as 529 plans, named after the section of the tax code that provides for their favorable tax treatment. The 529 plan is an investment account that was designed to help pay for future qualified education expenses including tuition, books, supplies, and other equipment, room and board.
You own the account and your child is the beneficiary so you can avoid the Harley versus Harvard dilemma where your kid decides he would rather buy a Harley and see the country than spend four years at Harvard. With a typical account that is owned by the child, as soon as the child reaches the age of majority the money is legally theirs. They can show up at the bank on their 18th birthday withdraw all of the money from the account and ride off into the sunset.
Another nice thing about 529 plans is that earnings in the account are tax free when withdrawn to pay for qualified college education expenses.
Supercharging your 529 plan
The tax benefits and parental ownership are great features but if you really want to supercharge the value of the 529 plan, you need to get others to help you fund it. Grandparents, aunts and uncles, cousins even friends, anyone can help build the account.
Once you open the account you can go to a 529 plan registry like Freshman Fund that connects friends and family with your child’s college fund. A 529 plan registry is similar to a gift registry where you sign up and friends and family can go to the registry to make a gift donation for your child’s college education fund.
Freshman Fund makes it easy for people to contribute to your child’s 529 plan by providing a customized webpage where they can go to make donations. The account is free to sign up and all you need is your 529 plan information, the name of your child, your email address and the date of birth for your child.
Your account can list more than one child and if you like, there is an option to upload a picture so contributors can see who they are helping. And if you don’t have your plan information handy when you sign up you can leave the sections blank and fill them in later.
Once you’ve created the account, you have the option of importing your Yahoo, Gmail, Linkedin or other address book so you can notify those people in your network who might be interested in contributing to your child’s 529 plan. You can also set up holiday and birthday reminders which can be a simple way for friends and relatives to give a meaningful gift.
You can select which contacts receive invitations to contribute and craft custom or boilerplate messages to invite them to donate. When they decide to contribute they are directed to a webpage that is set up in your child’s name complete with their picture if you chose to add one.
How do you get started?
529 plans are very easy to set up and fund. Here are two great resources to get you started: this is a great article in Smart Money to get you familiarized with the basics. To really get down to the nuts and bolts and find the plan that is right for you check out this site, Savingforcollege.com.
Get started today by taking three simple actions, open a 529 college savings plan, signup for a 529 plan registry, and get the word out to friends and family. The holidays are just around the corner and there’s no better way to get a jump start on your child’s college education savings and free up cash in your spending plan to pay-off your own student loans. Fund your 529 plan today.
- Ron Paul May Isolate Potential Supporters on Student Loan Programs (usnews.com)
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- 529 Plans Roll Out New Perks (online.wsj.com)