Introduction to 529 College Savings Plans
Thanks to recent actions by the United States Congress, 529 plans enjoy permanent...
Over the long haul, there has been one significant deciding factor when it comes to societal and economic success. And that’s been access to education. While there have been success stories that didn’t involve higher education, the reality is, the surest path to financial success and happiness involves a college degree. Even Bill Gates and Mark Zuckerberg went to college for a while before starting their respective companies. Which is why it’s important for parents to save for college and post-secondary education.
This is especially true given the continued rising costs associated with a college degree.
These days, the cost for a four-year degree can be as much as purchasing a home. Meanwhile, the costs of borrowing in order to pay for that price tag are rising exponentially as well. Paying back these loans are putting a major crimp on post-graduate life by delaying major milestones such as homeownership and starting a family.
As the importance of having a college degree grows and the price tag to obtain that degree surges, the time has never been more important for guardians to save for college.
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The differences between having a college degree or post-secondary education and not have never been so stark as they are today. The jobs of today and tomorrow all require an advanced knowledge base, and employers of all stripes are looking to hire people with that knowledge. This has resulted in some of the highest disparities in income for degree holders versus those without a degree.
And there’s plenty of data to back this fact up.
A study from Georgetown University found that college graduates on average earn $1 million more in earnings over their lifetime than non-degree holders. A similar study by the Pew Research Center shows that the median yearly income gap between high school and college graduates is around $17,500 per year.
Turning to official government data, the Bureau of Labor Statistics shows that full-time workers with a bachelor’s degree earn on average $1,189 per week. This compares to $515 for workers without a high school diploma and $718 for high school graduates with no college. Full-time workers with advanced degrees, such as a professional or master’s degree, had median weekly earnings of $1,451.
So clearly having a degree is important for future financial and societal success. The problem comes down to the rising cost of obtaining that degree.
For a student enrolling today, obtaining a four-year degree will cost you around $44,000 at a public university. That number jumps to more than $150,000 for a private college. Over the longer term, the picture gets even more expensive.
Tuition costs have long outpaced inflation as measured by the Consumer Price Index (CPI). Over the last decade, industry group The College Board has shown that the historical rate of tuition increases approximately 5% per annum. For a child born today and enrolling in college in 2036, those numbers jump to $106,000 and $371,000, respectively.
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Those are staggering sums – both today’s costs and future projections. And increasingly, parents and students are turning to loans in order to finance that education. But this is a problem unto itself.
The latest statistics show that roughly 44.7 million Americans owe more than $1.53 trillion in total student loan debt. And those balances are high with the average 2018 graduate leaving school with $29,800 in debt. Monthly payments for that debt average around $299. With payoff times between 10 and 30 years, this huge debt burden is having a real effect on several key life milestones.
Despite their higher salaries, many college graduates simply can’t afford some luxuries that previous generations were able to obtain. Many graduates are delaying or abstaining from home ownership purchases, paying for weddings, cars, vacations and having children – really they’re postponing “normal” life decisions. In addition, many recent graduates are postponing saving for retirement or saving less than they should. This sets up a potential double-whammy, and it’s all due to higher loan balances.
For parents, grandparents and other guardians, this is a huge quandary. Having a college degree is almost a necessity for success, but paying for that degree is a major issue. The answer to that is to start saving for college as soon as possible. Any savings to help defray the staggering cost of higher education is certainly welcome. Even reducing the average debt balance/monthly repayment by half can seriously benefit future graduates on the path of life.
This is why having a 529 plan specially earmarked for college savings is a must in this day and age. The plan offers a tax-deferred way to save for higher education and can be used to give children the degree needed for success – without the burden of student loans and the issues that come with them.
And even if you don’t go the 529 plan route and use a different vehicle – such as a UGMA/UTMA, taxable brokerage account or simply cash savings – the idea is the same. Saving for college now will help your future student over the longer haul.
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Higher education and a college degree are still one of the surefire ways to find success. But getting that degree continues to be more expensive. With student loans now crimping many borrowers, saving for college ahead of time has never been more important. Parents and other guardians need to take up the task either with a 529 plan or other savings vehicles.
Be sure to check our 529 Insights section here to learn more about the 529 plan.