Concerned about the high price of college? and student loan debt and retirement plan? Here’s a strategy you should consider.
Student loan debt management offers comfortable living and retirement savings options.(Photo: iStock)
According to The Motley Fool’s article, the average federal student loan borrower today owes a staggering $37,338 in student loan debt, which is not surprising given the steadily rising cost of higher education over the past few decades. You must do your best to save for college if you want to save your child from that fate. Less borrowing will be necessary on your child’s part as you can save more money for their education.
You now have options when it comes to college savings plans. You have the most financial freedom with a taxable brokerage account. Instead, you might want to think about a 529 plan. A new rule allows 529 plans to partially fulfill the role of a retirement plan, in addition to providing some tax benefits when you are building a college fund.
READ ALSO: Direct Facebook Class Action Lawsuit Payment: Here’s What You Need To Know
Advantages of 529 plans
The money you put into a 529 plan is not tax deductible at the federal level, though some states provide their incentives. Gains on investments made in a 529 plan, however, can be withdrawn tax-free. Additionally, withdrawals are tax-free as long as they are used to cover legitimate educational costs.
According to studentloanplanner, 529 plans are no longer just for college, to be precise. If you choose, you can use a 529 plan to pay for a private elementary or high school. However, if you want to specifically accumulate a college fund, you should put that money aside and refrain from using it for other purposes, such as education.
The drawback of contributing to a 529 plan is that withdrawals for non-educational costs are taxed and subject to a 10% penalty. Your account’s principal contributions, which are made on an after-tax basis, are not subject to this penalty; rather, it only applies to the gains portion of your account. However, the 10% penalty is still sufficient to discourage some people from saving in a 529.
Calculating the cost of college in advance is not always simple. And while it’s simple to argue that having extra money in a 529 plan after paying for college is a good problem to have, having to pay a 10% penalty on your extra money is, quite frankly, annoying.
529 plans were a good choice to take into consideration for college savings even before this most recent change. But in light of it, trying a 529 plan is even more worthwhile. If you fund yours well, your child might be able to complete college without having to take out any student loan debt.
