Few would argue that one of the best ways of securing a bright future is getting a college degree. While a college degree is a great investment, the cost can be steep. In fact, once newly minted graduates enter the working world, they're often burdened with high student loan debt.
According to the National Bureau of Economic Research (NBER), in the ten-year span between 2003 and 2013, the number of 25-year-olds with student loan debt grew from 25% to 45%. Perhaps even more alarming is the share of people under the age of 30 who were late on their payments: 35% in 2012, compared to 20% in 2004.1
You can help your grandchild or loved one to reduce this burden through a 529 plan.
What, exactly, is a 529 plan?
A 529 plan is a tax-advantaged investment account. With 529 plans, families can help pay for tuition, books and other qualified college expenses at most accredited colleges, universities, and vocational and technical schools nationwide. Additionally, 529 plan contributions can grow federal income-tax free.
As with any savings strategy, contributing to a 529 plan on a regular basis is perhaps the best way to build the nest egg that can help pay for higher education. But what makes 529 plans so advantageous is how the rate of interest can accrue compared to other investments.
For example, imagine a plan in which $100 is contributed each month, with a 5% annual growth rate and a tax rate of 30%. In the amount of time it takes one to save $30,000, a 529 plan has the potential to surpass this amount by almost $5,000. This is because of the federal income-tax free status. Please note this is a hypothetical example for illustrative purposes and does not predict 529 account investment performance.
In some states, you can start a 529 plan for as little as $25, and you may get tax credits for your contributions.
Investment experts can help you manage a 529 plan. For more information, visit www.AARPcollegesavings.com or speak with a TIAA-CREF Education Savings Specialist today at 866 717-9452.
1 "Is There a Better Way to Deal With Student-Loan Debt?” National Journal, February 9, 2015
The AARP College Savings Solutions from TIAA-CREF is provided by TIAA-CREF not AARP or its affiliates. TIAA-CREF pays a royalty fee to AARP for the use of its intellectual property. These fees are used for the general purposes of AARP. AARP does not employ or endorse TIAA-CREF associates. Offers are subject to change and may have restrictions. Please contact TIAA-CREF directly for details.
The tax information contained herein is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax penalties. Taxpayers should seek advice from an independent tax advisor based on their own particular circumstances. Non-qualified withdrawals may be subject to federal and state taxes and the additional federal 10% tax. There may also be state penalties for non-qualified withdrawals.
Please note the above illustration does not consider the fluctuations inherent in investment products.