One way to fund your child’s college education is to contribute to a 529 savings plan. While each state now operates at least one of these education savings plans, students can usually attend a college anywhere in the U.S. Although a 529 savings plan is designed similar to a 401(k) or IRA, the specific features and benefits vary among states. To get the most out of your investment and gain the maximum benefit these plans offer, it is important to understand how they work.
Estimate your child’s probable college costs. Inquire about the current annual costs for tuition and fees at several state and private colleges (see Resources below). Factors to consider include what percentage of these costs you want your investment savings to cover, as well as whether you want to reach your savings goal by the time your child enters or graduates from college. How much you need to save also will be based on how much costs are expected to rise annually. Statistical data compiled by the College Board following a 2003-2004 survey show that tuition at four-year colleges has been rising at about a rate of about 6% each year (see Reference 3).
Assess how much investment risk you can afford to take. This will help you set your savings goals and find the right plan. Unless you are in a financial position to take more risk to earn higher returns, you might want to invest your child’s savings more conservatively. If you do invest in riskier options, the time to do it is while your child is younger so that you still have time to recoup any losses.
Enroll in a 529 plan in either your home state or another (see Resources below). While you are given the choice of investing in different options, compare the plans offered by different states. You can enroll directly through the state’s plan manager or hire a financial adviser. Whether you hire a financial planner, broker, finance attorney or CPA to help you create and manage a diversified investment portfolio, choose someone who will provide the financial guidance you need. The person’s education, training and number of years experience are important factors to consider.
Decide what percentage of your assets to invest in each of the fund options you choose for your investment portfolio. If your child will be going off to college within the next two or three years, you might not want to invest in the stock market in the event that you lose money and do not have the time to make it up. A wiser option would be to keep the assets in cash so that you can liquidate them quickly. On the other hand, if your child is still very young, consider investing in the stock market in an effort to earn higher returns.
Invest primarily in bonds if your child will be of college age sometime between the next three to eight years. But no matter what type of investment options you choose, be sure to diversify your portfolio. Never put all your money in a single investment option.
Review the performance of your investment portfolio annually. As your child gets closer to college age, be sure that your investments are yielding enough returns to meet your financial goals. Take a careful look at the quarterly reports. If an investment is not performing the way you expected, consider making some changes. Keep in mind that with a 529 plan you can change investments just once each year.