With college costs on the rise, families need to start saving early

Originally published May 23, 2022 on Argus Leader; edited from the original.

College expenses are high, and rising every year. In 2022, a student who attended a public in-state school paid an average of $101,948 for their tuition, fees, room and board. But according to projections from the College Savings Plan Network, children who were toddlers in 2022 will eventually pay over double that amount ($261,277) for the same college experience.

Higher education is expensive; however, the career value it provides is undeniable. Per research from the U.S Department of Labor, those who attend college typically enjoy higher pay, more career choices, lower unemployment rates, and more benefits than those who forego higher education.

“It’s an investment in a child’s future,” South Dakota State Treasurer Josh Haeder summarized. “A college education imparts critical skills and provides access to professional opportunities. In many ways, it can be seen as a springboard for success.”

Fortunately, there’s a straightforward solution for parents who want to support their children and maintain their own financial health: start saving early. 

“It might be a cliché to say that the early bird catches the worm — but in this case, it’s true,” Haeder said. “The sooner you start putting aside money for your child’s college fund, the better off they’ll be when they finally start looking for schools.”

But when, exactly, should parents start looking into college savings accounts? Haeder offers a rule of thumb.

“Open a college savings account before the child turns 12,” he suggested. “That gives you plenty of time to gather funds without putting yourself or your own financial interests under pressure when your beneficiary is ready to leave the nest.”

That said, saving is only one part of the financing puzzle. For parents, deciding where to store accrued funds can pose another challenge.

Saving practicalities: understanding the value of a 529 plan

In theory, saving for college is easy; parents simply take money from their accounts and set it aside, leaving it for the day that their child eventually needs it. But in practice, building a college fund is a little more complicated.

“If college savings reside in a normal savings account, they will pose tax headaches,” Haeder explained. “No matter what you plan to use that money for, the IRS will consider it a part of your taxable assets — and if you disburse more than $17,000 to your child in a year, you’ll need to file gift taxes.”

Fortunately, parents can sidestep these difficulties by opting into the right savings vehicle. Haeder offers an idea: 529 plans.

“There’s no doubt in my mind that 529 plans are a compelling option for parents and grandparents who want to save money for a child’s tuition,” he said. “They provide certain potential tax benefits, facilitate savings growth opportunities and give agency to the account holder.”

529 plans are state-sponsored accounts designed to encourage account holders to save money for educational expenses. Unlike traditional savings accounts — which simply maintain stored amounts — 529s invest an account holder’s contributions in a selection of mutual funds. Account holders establish their investment risk tolerance and, in some cases, can opt into target-date funds that become more conservative as a child approaches college age.

According to Haeder, the plans may also offer an array of tax benefits to encourage holders to grow their college savings.

“Account holders don’t need to pay income taxes on their 529 earnings so long as the money remains in the account,” Haeder explained. “And, if money is withdrawn to cover qualified expenses — think books, tuition, meal plans — you won’t need to pay federal income taxes on it at all. Some states even offer tax credits or deductions for 529 contributions.”

But that’s not all. According to Haeder, 529s are also appealing because they are tailored for student supporters rather than the students themselves. While anyone can open a 529, they are typically held by parents, grandparents, or other family members who want to facilitate a child’s education.

“529 plans are custodial accounts, so the person who opens it maintains control over the funds,” he said. “A parent or grandparent might choose to hand over the account once the beneficiary turns 18, but that choice is up to them.”

Moreover, because 529 plans are viewed as belonging to the account owner rather than the student directly, they have less impact on financial aid decisions.

“The federal financial aid formula expects students to use 20% of their own assets to pay for college. But for parents, that number is just 6%,” Haeder noted. “By opening a 529, parents can provide support without worrying that their contribution will hamper a student’s chances of receiving federal financial aid.”

Of course, some parents might wonder if it’s worth maintaining a 529 if their child doesn’t seem interested in attending a four-year program. Haeder, for his part, encourages parents to stay the course.

“If your child doesn’t want to take on a bachelor’s degree, that’s okay,” he said. “529 plans also cover associate programs and some apprenticeships. The account is worth keeping regardless; if the original beneficiary truly doesn’t have an interest in education, you can always transfer those funds to another beneficiary.”

In South Dakota, a CollegeAccess 529 plan offers a savings springboard

Every state sponsors a college savings plan — but in South Dakota, the value of the state’s CollegeAccess 529 far outshines the average.

The plan provides access to a network of top-tier investment firms and offers an extensive list of benefits for account holders. Account holders enjoy a high contribution limit ($350,000 per beneficiary), statutory creditor projection, and the ability to make changes with one simple phone call. Savers can also establish trust or corporate ownership over their account if they have specific preferences for how, when, or for whom such funds should be used. Those concerned for their child’s financial well-being can further opt into UGMA/UTMA investments to reduce the minor’s tax burden and increase their aid outlook.

“In South Dakota, we want saving for college to be easy and intuitive,” Haeder concluded. “Higher education is a significant investment, to be sure — but one with returns that will last for a lifetime.”