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Smart Savings: 529 Plans

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Smart Savings: 529 Plans

With Knox County’s Fall Break upon us, Knoxville parents with school-age children are wondering where the time has gone. Before you know it, your 1st grader will be applying for college.

It’s no secret that college is expensive, and parental support runs a broad spectrum. According to a study by student loan giant Sallie Mae, tuition and fees for the past school year averaged $9,970 for in-state students, $25,620 for out-of-state students and $34,740 for private school students. (This does not include housing, meal plans, transportation, or books!) Of these costs, an average of 23% were covered by parents’ income and savings, whereas 11% were covered by students’ income and savings. Loans, lottery money and scholarships covered the rest.

With a 529 Education Savings Plan, money is invested in a state-sponsored investment accounts. Typically the investment mix becomes more conservative as the child gets closer to college age. Although contributions are not deductible, earnings are tax-free if used for “qualified higher education expenses” at any college. This includes tuition, room and board, fees, books, computers and software. New in 2018, these funds can also cover up to $10,000 tuition to any elementary or secondary school per year.

You can also use 529 money to pay for trade and vocational schools. Did you know that many licensed and trained plumbers, electricians and other tradesmen make over $100,000 per year? How many 17-year-olds understand this?

Attention grandparents: 529 contributions make great gifts to grandchildren! I guarantee that contributions to a 529 plan will be there long after all the Polly Pocket pieces are lost. I urge you to view the next generation’s schooling as an investment, and their educational outcomes as the return. Ideally you’d spend as little as possible in order to get the desired post-grad return: a well-rounded education, a fitting job that allows them to live comfortably and minimal debt as they begins their own independent financial life.

Never tell your child that he can attend any college he wants. You might be making a promise that is foolish or impossible to keep. Many times a 17-year-old will make his choice based on the sports program or attractiveness of the coed conducting the campus tour. I believe that selecting which college to attend is a family decision. Parents and children will have to collaborate and reach a consensus based upon financial and non-financial facts and circumstances. It is hard to pass up the lottery money provided by our schools in Tennessee, especially if you plan on attending graduate school.

Before your child reaches college age, assess your own capacity for support and maintain open communication regarding budgets and expectations. Encourage majors that both align with your student and lend themselves to the job market and shop for schools based on programs and practicality rather than name and location. Narrow down each list and juxtapose the lucrativeness of the majors with the costs of each school. Even if the tuition doesn’t break your bank, supporting a child for a decade after he graduates might.

Many young folks today elect to attend graduate school. Do not stress if your child wants to major in anthropology or history. Two of my four children graduated in liberal arts majors that prepared them for graduate school and taught them to think and work hard. A liberal arts education is valuable, especially when you consider that many folks elect continue into post-grad education.

Start saving early and utilize the tax benefits of a 529 Plan. Then, analyze the likelihood of a “good return” given your student’s goals and your own finances, and offer support accordingly. Do not sacrifice your own financial health to support an unwise education route. This is one of the most important investments you will make; be smart about it!

This article was featured in the October 7, 2018, print version of the Knoxville News Sentinel, and online at KnoxNews.com. Tom Coulter, President of Meridian Trust, can be reached at (865) 342-4440 or tcoulter@trustmeridian.com.