How to Use a 529 Plan to Pay for College
Find out how using a 529 plan makes it easy to pay for the college of your dreams.
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...your earnings will be subject to tax and a 10% penalty. So be sure to calculate your student’s potential total college costs as closely as possible. I’ll give you some tips to do that in just a moment.
So, instead of delaying education savings until your children reach college age, start a simple plan now. This will reduce financial stress and make sure that you child doesn’t have to miss college or begin their career with a mountain of student loan debt.
Here are 3 simple steps to pay for college using a 529 plan:
Step #1: Calculate the Cost
Since every financial goal begins with the end in mind, you’ve got to know what college will cost when your child is ready to attend. Obviously, there are many factors to consider, such as the school, the degree, inflation, and any scholarships or grants received.
While it might seem like you need a fortune teller to come up with a realistic number, here are some handy tools that will help:
- How Much Will That College Really Cost? Calculator
- CollegeSavings.org Cost Calculator
- Vanguard’s College Cost Projector
If you have specific schools in mind, contact their admission offices and ask for cost estimates based on your child’s current age. Or consider the cost of a few different schools in various price ranges and take an average. You just need to come up with a target number for planning and can refine it later.
Step #2: Figure Out Your Contribution
As I mentioned, there’s no parenting rule book that says you’re required to pay 100% of a child’s education. After you calculate what college could realistically cost, figure out what’s reasonable for you. Maybe it’s one half, a small percentage, or nothing—especially if your finances are in really bad shape right now.
For instance, if you have a 7-year-old and figure that attending an in-state university will cost $15,000 per year in 10 years when she’s ready to go, that’s a total of $60,000 for a 4 year program. If saving $60,000 over the next 10 years would prevent you from reaching your retirement goals, maybe you could create a plan to squirrel away $20,000 for college instead.
I cover college savings in my award-winning book, Money Girl’s Smart Moves to Grow Rich. One option I suggest in the book is called the Plan of Thirds: You save a third of the cost before college starts, pay for a third during college, and pay the final third after graduation using student loans.
It can be very helpful to use a financial advisor for college planning. He or she can put education savings in the context of the big picture of your finances. You can learn more in How Do You Find a Financial Advisor? Part 1 and Part 2.
Step #3: Pick a Savings Vehicle
After you have a college cost estimate and know how much of it you can pay for, it’s time to choose a 529 plan. There are two types: prepaid tuition plans and savings plans. Here's the difference...