(NewsUSA) - People who worry about financing a college education for children or grandchildren have got plenty of company. More than 70 percent of parents with children under 18 say that paying for college is their top financial concern, according to Gallup's 2001-2015 Economic and Personal Finance survey.
Young adults are worried too. Asked by Gallup to identify the top financial problem facing their families, more than one in five respondents aged 18 to 29 said it was paying tuition or college loans.
Fortunately, there's a way to put money aside for education in an investment account where the savings can grow over the years, free from federal income taxes. What's more, the student doesn't have to pay federal income taxes on withdrawals from the account, as long as the money is used for qualified higher education expenses, which include tuition, books, fees, supplies and other approved expenses at accredited institutions.
"With the costs of higher education continuing to rise, knowledgeable families are taking advantage of 529 college savings plans," says Kris Spazafumo, Vice President, Investment Services, at Los Angeles-based American Funds, which manages CollegeAmerica. It's the country's largest 529 plan, with nearly $50 billion in assets, as of March 31, 2015. "More than 1.2 million families nationwide are now saving for college with CollegeAmerica on behalf of 2.1 million future college students, and we expect that number to grow as more people become aware of the many benefits that 529 plans offer."
Flexibility is a key feature of 529 plans. Parents and grandparents maintain control of the account, decide when and if to disburse the proceeds and retain the ability to change the beneficiaries. For example, if the child originally named as beneficiary doesn't need the money or doesn't go to college, the account beneficiary can be changed to another family member who might benefit. Account owners can even use the money for their own qualifying educational expenses to obtain a graduate degree, for instance, or specialized career training.
Anyone can open a 529 college savings plan, regardless of income, and can contribute up to $14,000 ($28,000 for married couples) annually without gift-tax consequences, and that money isn't considered part of the account owner's estate.
Since 529 plans are long-term investment vehicles, it's important to choose a plan that offers a wide range of investment options and proven management expertise, says Spazafumo, who notes that CollegeAmerica offers a number of choices from the highly rated American Funds mutual fund family.
Financing higher education requires saving consistently over the long term, but it's not impossible.
"A college education is a great investment, resulting in an estimated 70 percent more lifetime income and a 50 percent lower chance of being unemployed," Spazafumo says, adding that saving for college is a much less costly approach than borrowing. "Earning an 8 percent return, rather than paying 8 percent interest, a family with a goal of $10,000 in college savings can attain that by saving a total of $7,000 over 10 years, as opposed to repaying a total of $14,000 over 10 years if they had borrowed the $10,000."
Not only is borrowing more costly than saving your way to college, Spazafumo points out that there's evidence many students aren't able to keep up with their loan obligations. According to the Department of Education, borrowers who were due to start repaying their student loans in 2011 had a 13.7 percent default rate last year, thus damaging their credit ratings just as they were beginning their working lives.
Education has always been the pathway to higher incomes and job satisfaction, and that's likely to be truer than ever in the years to come. Combining a disciplined savings program with the right 529 college savings plan can help make your family member's dreams of college a reality.
CollegeAmerica is sponsored by Virginia529 and is distributed by American Funds Distributors, Inc. Interests in CollegeAmerica are sold through unaffiliated intermediaries.
Depending on your state of residence, there may be an in-state plan that provides tax and other benefits not available through CollegeAmerica. If withdrawals are used for purposes other than higher education, the earnings will be subject to a 10 percent federal tax penalty in addition to federal and, if applicable, state income tax.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectus, summary prospectus and CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing.