Why You May Want to Plan Ahead for Your Child’s College Tuition
Have you ever wished that your parents had saved money for your college education? Are you a parent who wants to be able to do this for your own children? You’re not alone. I’ve had many clients and family members ask me how they should be saving for their children’s college tuition. As more and more people attend college, and tuition rates continue to go up, it’s important to have a plan.
How college attendance in the U.S. used to be
College attendance and tuition rates have not always been what they are now. In fact, for many years, only the wealthy elite could attend college. At that time, tuition was either very low or nonexistent, but most people couldn’t afford the living expenses that came from attending an institute of higher education. Things started to change in the 1920s, when men and women alike began enrolling in college at higher rates. By the end of that decade, 20 percent of college-age Americans were enrolled.
When and how the tides began to change
However, it wasn’t until the mid-1940s that a college education became more accessible than ever before. After World War II, the Servicemen’s Readjustment Act of 1944, better known as the GI Bill of Rights, was passed. Veterans began going to college in droves - eight million of them enrolled, which was 10 times more than legislators had expected. At that point, college costs did not increase, because states decided to respond to the demand by investing more in higher education. The federal government also got involved by creating things like the National Defense Student Loan program (later called the Federal Perkins Loan program, as you’ve probably heard of it), which did for civilians what the GI Bill had done for veterans.
Thanks to the Civil Rights Movement, the Higher Education Act of 1965 was passed, which pushed for greater college access for women and minorities. For several years after the legislation was passed, colleges and the government provided grants and other forms of financial aid, making it possible for many more Americans to attend college at an affordable cost.
How we got to where we are now
Things really started to change around 1970. Inflation rates were high and the economy was suffering. In turn, college tuition rates went up with the inflation rate. This was the time that subsidized loans began to replace grants. Borrowing money for college became much more common, and government investment in higher education went down. According to Sandy Baum of the Urban Institute, that drop in investment has been the single biggest reason for the increase in college costs.
I wanted to give you all this history and background information to help you understand how we got to where we are today. College tuition costs are sky-high, with no sign of coming back down. Millennials are overwhelmed by student loan debt, which results in delaying things like buying a house, getting married, or starting a family. At the same time, more than ever we’re expected (or required) to have a college degree, as people with a degree will earn more money over the course of their lives.
What you can do next to prepare
So what should you do when you’re stuck between a rock and a hard place: unaffordable college tuition and the necessity of a college degree? Start planning early.
As with most financial topics, we don’t talk much about college savings, but we’re expected to know all about it. I want to help educate my followers about their options for saving for their children’s college tuition. So when I was approached to write about Maryland 529, I was thrilled!
Maryland 529 (formerly College Savings Plans of Maryland) is an independent, non-profit state agency that provides flexible and affordable 529 plans to help Maryland families save for future college expenses and reduce dependence on student loans.
What exactly is a 529 plan? A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. These plans are sponsored by states, state agencies, or educational institutions, and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: pre-paid tuition plans and college savings plans. Almost every state, and the District of Columbia, sponsors at least one type of 529 plan.
Maryland 529 has a program called the Save4College State Contribution Program. This program is designed to help lower to middle-income families in Maryland save money for higher education. Right now, if you open a new Maryland College Investment Plan with them, you can receive a free $250 contribution to your account. If you open the account between now and June 1, 2017, you are eligible for this offer*. From there, you have until November 1, 2017 to make the minimum contribution required to qualify for the $250.
Luckily, the minimum contribution requirement varies based on your household income. Anyone making $49,999 or less ($74,999 or less as joint income) only has to contribute $25 to receive the $250 match amount. If you earn $50,000-$87,499 ($75,000-$124,499 as joint income), you only have to contribute $100. Anyone earning $87,500-$112,500 ($125,000-$175,000) has to contribute $250 to receive the match. Regardless of your required contribution, this is free money! It will help you get a head start on saving for your kids’ college tuition.
To be eligible for this program, the beneficiary must be a Maryland resident, your Maryland taxable income must not exceed $112,500 as an individual (or $175,000 as a couple), and you must submit your application prior to June 1, 2017.
For more information, or to apply for this program, visit Maryland529.com/MDMatch250.
Don’t sacrifice your own life savings
I think it’s very important to begin saving for our children’s future. We want to lighten their burdens as much as we possibly can. Plus, kids who have at least some money saved for college are more likely to enroll in and graduate from college. However, don’t sacrifice your own livelihood to save for college. If you have to make a choice between saving for college OR saving for retirement, you must prioritize retirement savings. You can take out loans for college, but you can’t take out loans for retirement.
*You must have had no existing accounts for the same holder/beneficiary before January 1, 2017.
State Contributions are not guaranteed. The State funding for contributions is limited to (i) $5,000,000 in fiscal year 2018, (ii) $7,000,000 in fiscal year 2019, and (iii) $10,000,000 in fiscal year 2020 and each fiscal year thereafter. As with the entire State budget, the Maryland General Assembly has final approval. If resources are insufficient to fully fund all eligible accounts, Maryland 529 shall provide contributions in the order in which applications are received and give priority to applications of Account Holders who did not receive a State Contribution in any prior year. Please note, an Account Holder is not eligible for the State income deduction on their taxes for any taxable year in which the Account Holder receives a State contribution. You should check with your tax advisor regarding your specific situation.
Please read the Enrollment Kit at https://maryland529.com which describes the investment objectives, risks, expenses, and other important information that you should consider carefully before you invest. If you or your beneficiary live outside of Maryland, you should consider before investing whether your state or your beneficiary’s state offer state tax or other benefits for investing in its 529 plan.
Note: This is a sponsored post, which means that I received compensation to write it. However, I would never publish anything that I don’t fully support. If you have questions, please reach out at [email protected].