As reported in the Los Angeles Times, 529 plan contributions saw a 75% increase in the past two years, although contributions are still below the 2006 level.
According to the article, "U.S. families poured a net $9 billion into 529 plans last year, up from $5.1 billion in 2008, and the pace accelerated in the first quarter of this year, according to Financial Research Corp. in Boston. The annual peak was $13.9 billion in 2006."
The increase is reflective of two major considerations. First, the apparent recovery and stability of markets have brought back many investors who waited out the past few years. Second, the cost of college just continues to increase, striking worry into families with younger children.
Parents with younger children are taking note of students entering college now. They realize that college is a major financial commitment and want to help as best they can. Saving in a 529 plan is most effective when started early because it gives savings time to grow.
The problem that faced many students attempting to start school in 2008-2009 was that any 529 money saved may have been reduced due to market performance. This is another reminder to periodically review your portfolio. As a student matures, any money saved in a 529 plan should shift assets away from volatile stock-based investments and move to fixed income. This way, any money saved can be more predictably managed by the academic year.
If you have a student starting school now and have not been able to save much in a 529 plan, the next logical choice is student loans. Of course, families should tap financial aid and scholarships before applying for any additional student loans, but not all families qualify for these funding sources.
Parents may be tempted to withdraw from retirement savings to help pay for college costs. With stiff penalties in addition to taxes due, parents should not pull money for retirement to pay for student tuition. You can borrow for college, but you cannot borrow for retirement.
Ken O'Connor is a financial aid expert and the director of student advocacy at cuStudentLoans.org. Learn more about credit union private student loans and college planning by visiting his blog.
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