Your Money Matters: Student loans and 529 savings plans

Kathy Roesser

Kathy’s Tips:

At the current rate of inflation, the cost of college in 18 years could be $442K total or $110K per year.

If you don’t start saving now, your kid may have to take on more debt than they would have had to and you are missing out on the tax advantages of certain education savings accounts. For example, With any 529 savings plan, the money that you invest will grow without being subject to federal income tax. And you’ll also avoid paying federal income taxes on any money that you take out of the plan—as long as you use it to pay for qualified educational expenses, such as room and board, tuition and books.

Don’t let signing up for a 529 paralyze you. You can always change if the one you pick doesn’t end up working for you. Don’t put off savings because you think that your child will score a full ride on a scholarship as an athlete or a merit scholar. You may be right, but full rides are rare — and you don’t want your kid to suffer the consequences of your misplaced optimism. If your child does get a scholarship, you can transfer a 529 savings plan to a sibling or another beneficiary — even yourself— to be used tax-free for qualified education expenses

The President signed a new law that makes it easier for students to pay back their federal college loans. Starting in 2014, new borrowers will pay no more than 10 percent of their disposable income, and the President recently proposed accelerating this benefit for current students. The law also allows any remaining debt to be forgiven after 20 years. Those engaged in public-service professions—such as teachers, nurses, or members of the armed forces—will have any remaining debt forgiven after 10 years if they make their payments on time.

The 529 plan really makes a difference. If you can afford to only put away $50 a month it is worth it. You will be amazed on how it can grow over time and might mean less loans and debt in the future.

It is never too late to add to 529 plans, you just need to make sure you invest in the appropriate investment strategy/fund.

Morgan Stanley


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