For many, springtime is a reminder of graduations, final exams and decisions about where soon-to-be freshman will attend college. These memories can fade quickly, however, when confronted with the very real, and rising, cost of paying for college.
While recent tuition hikes have been relatively small by historical standards, costs have still been rising faster than general inflation. According to the College Board’s Trends in College Pricing, the average cost of a full-time year at a public four-year institution was 40 percent higher, after adjusting for inflation, in 2015-2016 than it was in 2005-2006.
Fortunately, state-sponsored programs known as 529 college-savings plans can help families meet the daunting challenge of saving for college.
A 529 college-savings plan is an investment account that is allowed to grow, and eventually be withdrawn, tax-free if used for qualified higher education expenses. Anyone can open a 529 plan in any state, and the plan beneficiary can attend any accredited college. If the intended beneficiary does not go to college, the account owner can change the beneficiary to another family member (broadly defined) to avoid penalties. If funds are withdrawn for non-educational purposes, however, the plan owner must pay taxes on any earnings, plus a 10 percent penalty.
Nearly every state offers a 529 plan, so determining which plan is most appropriate can be a challenge. When researching the 529 plan universe, we look for low costs, broad investment diversification, and ease of use (account opening, online access, etc.), in addition to any state tax deduction benefits. We also prefer plans that offer “age-based” portfolios, those which automatically—and appropriately—scale back risk as the beneficiary approaches college. This reduces the need for constant monitoring and rebalancing by the account owner.
With its broad mix of low-cost index fund options, the Oregon College Savings Plan is a great option for Oregonians just starting to save for college or who make annual contributions and can benefit from the $4,620 tax deduction (for joint filers). For residents who want to make a much larger one-time contribution, and for non-Oregon taxpayers whose state of residence doesn’t offer a compelling tax break, Utah’s plan can be a better choice.
Consider this: if the rising trend in college tuition and fees continues, a newborn today can expect to pay over $360,000 for four years of public out-of-state college. The best way to prepare for this is by saving and investing—early and often, using a tax-advantaged 529 plan.