How much should I save for my child's college education?
The amount varies widely depending on the type of college. Public in-state universities average $25,000-$35,000 per year, while private universities can cost $50,000-$80,000+ annually. A good rule is to save 1/3 of expected costs, with the rest covered by current income, scholarships, and loans. Use our calculator to find a personalized target based on your specific goals.
What is a 529 plan and how does it work?
A 529 plan is a tax-advantaged savings plan designed specifically for education expenses. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses like tuition, fees, room & board, and books. Many states also offer income tax deductions for contributions to their state's 529 plan.
Can I use a 529 plan for K-12 education?
Yes, since the Tax Cuts and Jobs Act of 2017, 529 plans can be used for up to $10,000 per year in K-12 tuition expenses at public, private, or religious schools. However, state tax benefits may vary, so check your specific state's rules before using 529 funds for K-12 education.
What happens if my child doesn't go to college?
You have several options: change the beneficiary to another family member (including yourself, a sibling, or a cousin), save the funds for graduate school, or withdraw the money. Non-qualified withdrawals are subject to income tax on earnings plus a 10% penalty, though there are exceptions for scholarships, military academy attendance, and disability.
How does college cost inflation compare to regular inflation?
College tuition inflation has historically averaged 5-6% annually, significantly higher than general inflation (2-3%). This means college costs double approximately every 12-14 years. Our calculator includes a college cost inflation rate input so you can plan for realistic future costs.
Should I prioritize retirement savings over college savings?
Generally, yes. Your child can take out student loans for college, but you cannot borrow for retirement. Aim to contribute enough to your retirement accounts to get any employer match, then split remaining savings between retirement and college. A common approach is the "1/3 rule": save 1/3 of college costs, pay 1/3 from current income during college, and cover 1/3 through loans and scholarships.
What's the best investment strategy for a 529 plan?
Most 529 plans offer age-based portfolios that automatically shift from aggressive to conservative investments as your child approaches college age. For young children (0-10), growth-focused stock funds are appropriate. As college nears (ages 15-18), shift to bonds and money market funds to protect accumulated savings from market downturns.
Can I open a 529 plan in any state?
Yes, you can open a 529 plan in any state, regardless of where you live. However, many states offer state income tax deductions only for contributions to their own state's plan. If your state offers a tax deduction, it's usually best to use your home state's plan. If not, compare plans from other states for lower fees and better investment options.
What expenses qualify for tax-free 529 withdrawals?
Qualified expenses include tuition and fees, room & board (on or off campus), books, supplies, equipment, and computer technology. Since 2018, up to $10,000 per year can also be used for K-12 tuition. Qualified apprenticeship program costs and up to $10,000 in student loan repayment are also eligible.
How do financial aid calculations factor in 529 plans?
For federal financial aid (FAFSA), parent-owned 529 plans are reported as parental assets, which are assessed at a maximum of 5.64%. This is more favorable than student-owned assets, which are assessed at 20%. Grandparent-owned 529 plans don't count as assets on the FAFSA but withdrawals count as student income, so timing matters for aid eligibility.