As long as you start early or have enough income to pay for college, it doesn’t matter how you go about it, right? No! The method you choose or account type can have a huge impact on your out of pocket costs. Below is a comparison of four different ways to handle college costs.
4 Ways to Pay for College
1. Section 529 Plans
The money contributed to these accounts generally grows tax-free if the funds are used for college expenses including tuition, fees, books and room and board for many students.
2. Investment Savings Account
The earnings on these non-retirement accounts are typically taxable, but there is more flexibility because the money does not have to be used towards college expenses.
3. Paying Once School Starts
If you have a high income you may not save for college because you feel you can just write a check when the time comes.
4. Student Loans
You might borrow to pay for college because you find it difficult to cover the entire cost or choose to put off saving and run out of time. Also, maybe your child having loans and some ‘skin’ in the game is not such a bad thing.
Still not sure which option is right for you? Assuming four years of college will cost $100,000, here is what you can expect to pay:
In summary, it could cost you more than 2.5 times as much money to wait and take student loans for college versus saving for 18 years in a 529 plan!
It is also important to note that money withdrawn from 529 plans that is not used for college expenses is generally subject to income taxes and a 10% penalty. Further, state tax deductions taken for 529 plan contributions may be recaptured on amounts not used for college. While a 529 plan can result in lower out of pocket expenses, you must consider which savings option is best for you and your financial situation.