Still struggling to find the perfect Christmas gift? If your recipient list includes families with young children, hardly any gift could rival a head start on funding a college education. A small contribution today to a 529 college savings plan could literally change the life and future income potential of a future scholar.
Lack of sufficient education remains the main contributor to worsening income inequality in the United States. But just as a post-secondary course of study has never been more critical, the costs are accelerating beyond the reach of too many. According to data from the College Board, the inflation rate for attendance at 4-year colleges is more than twice the rate for the consumer price index. Since 1980, average tuition and fees have increased by 7.1 percent per year at public institutions, from $804 to $9,648. Had consumer prices risen at the same rate, a pound of hamburger would cost $12 and the average new car would set you back $86,000.
Christopher HopkinsMany states attempted to tackle the problem of college saving through state-specific prepaid tuition programs as early as 1986. Recognizing the obvious benefit, Congress in 1996 created a framework for universally accepted savings programs administered by states but available to fund education at virtually any institution, including many trade and technical schools. Today, 529 savings plans hold nearly $230 billion in assets.
Conceptually, a 529 savings plan is similar to a Roth IRA. Contributions are not tax deductible, but all the growth and earnings compound free from federal taxation if used for approved higher educational expenses. Authorized expenditures include tuition and fees, room and board, textbooks and supplies including computers. Disbursements are controlled and approved by the account trustee named at the time of initiation (typically a parent but potentially the donor).
Additional funding can be made at any time, and while there is no stated annual maximum, most states limit the total of all principal contributions to $235,000 to $500,000 depending on the plan. There is no cap on growth and earnings.