Saving for College With Your Bank Is a Terrible Idea — Here’s What to Do Instead

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If you’re a parent, it might be hard to think about the future between cereal spills and crayon masterpieces on the wall.

But the cost of college is rising. By 2030, it’s projected to cost more than $205,000 for four years at a public college.

So, how do you prepare for your child’s future now? One of the best ways is with a 529 plan.

What is a 529 plan?

A 529 plan is an investment vehicle that allows you to save for your child’s education. There are two types: a college savings plan and a prepaid tuition plan. This article will focus on the former, which is more popular. But if you’re curious, you can check out the differences between 529 plans.

With the 529 college savings plan, you contribute money throughout your child’s life into an investment account. Then, when your child is ready to attend college, they can use the money for tuition, books, room and board, and other related expenses (even a computer).

The difference between a savings account and a 529 plan is the latter is invested into the stock market — which means it has the potential to earn more returns than a savings account.

Let’s say you contributed $100 per month for 18 years. Using our simple savings calculator, here’s what you’d end up with:

  • In a savings account at 1.00% interest (which you’d get only with a high-yield savings account), you’d have $23,655 by the time your child went to college.
  • In a 529 savings plan that earned average returns of 7 percent, you could have nearly double that amount: $43,072.

And don’t worry: It’s not like you’ll be picking and choosing stocks yourself. Each state’s 529 plan is managed by financial advisors. Most plans will start out riskier (more stocks and fewer bonds) and become more conservative (fewer stocks and more bonds) as your child nears college age.

Of course, you always expose yourself to risk when you invest in the market. If the ups and downs make you nervous, check out these alternatives to 529 plans.

The pros and cons of 529 plans

Consider these pros and cons when deciding if a 529 plan is right for you.

Pros

Cons

  • Minimum deposits: Some states require you to open a 529 plan with at least $1,000 or fund the account with a minimum amount per month.
  • Limited to education expenses only: If your child doesn’t attend college, your 529 plan’s earnings will be subject to taxes and a 10 percent penalty. One way to use the leftover 529 plan (and avoid the fees) is by passing it on to a sibling.

How to sign up for a 529 plan

Here are the steps you should follow when you’re ready to sign up for a 529 plan.

1. Choose your 529 plan

Since each state has its own 529 plan, most people sign up for the 529 plan where they live.

Although you’re welcome to cross state lines when you sign up for a 529 plan, most states won’t give you a tax credit if you use an out-of-state plan. That said, if you’re in a state that doesn’t levy an individual income tax or offer tax benefits for 529s, then you should shop around for the plan with the lowest fees and highest returns.

To compare plans, try this tool from SavingForCollege.com. It offers in-depth information about each state’s plan and allows you compare plans side by side.

what is a 529

Image credit: SavingForCollege.com

You also can open a 529 plan through a financial advisor — and not the state — but doing so usually means higher fees.

2. Open and fund the 529 plan

Once you choose the 529 plan that’s right for you, all that’s left to do is open it. You usually can do so online, and it’s helpful to have personal information — like Social Security numbers and birthdays — on hand.

You’ll also need to fund the 529 plan with a transfer from your checking account. Many states have no minimum contribution amount, but others require a transfer of at least $250.

One thing to note is you shouldn’t be saving for your child’s education over your retirement.

Although it might seem selfish, it makes financial sense. There are many ways to fund a college education (loans, scholarships, etc.), but no one can fund your retirement except you. So, only create a 529 plan if you’re already making good headway with your retirement fund.

3. Set up automatic contributions

Now is also a good time to set up regular contributions to your 529 account — even $25 per month adds up over the years. To see how much you should contribute, use this college cost calculator.

what is a 529 plan

Image credit: SavingForCollege.com

Going forward, you could ask family members to donate to your child’s 529 plan in lieu of gifts. Although it might take some getting used to, your child will be grateful by the time college rolls around.

Education is one of the best gifts there is. And if you’d like to help bestow it upon your child, a 529 plan might be the way to go.

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1 Important Disclosures for College Ave.

CollegeAve Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

(1)All rates shown include the auto-pay discount.  The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.

Information advertised valid as of 11/4/2019. Variable interest rates may increase after consummation.


2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Important Disclosures for Discover.

Discover Disclosures

  1. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  2. View Auto Reward Debit Reward Terms and Conditions at DiscoverStudentLoans.com/AutoDebitReward.
  3. Aggregate loan limits apply.
  4. Lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments. The interest rate ranges represent the lowest interest rate offered on the Discover Undergraduate Loan and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.250% as of October 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please visit discover.com/student-loans/interest-rates for more information about interest rates.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.

4 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).

  1.  Rates are as of July 1, 2019 and include auto-pay discount. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment. Variable rates may increase after consummation.

5 Important Disclosures for Citizens.

Citizens Disclosures

Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of December 1, 2019, the one-month LIBOR rate is 1.70%. Variable interest rates range from 2.80% – 11.06% (2.80% – 10.91% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.

Please Note: International Students are not eligible for the multi-year approval feature.

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3.52% – 9.50%4Undergraduate and Graduate

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Published in Big Money Decisions, Investments & Savings