The 411 on 529s

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It’s probable that Millennials will be saving for their children’s education while paying off their own.

By Michael Babikian, President and CEO of Transamerica Brokerage
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Millennials, or people born after 1980, who went to college in the early years of the 21st century, now have young families or are starting to think about it. Considering the oldest Millennials are currently cresting 30, the timing seems right. But what sets this generation apart from others is the age group’s indebtedness to education loans. It’s probable that they will be saving for their children’s education while they pay off theirs.

According to Pew Research Center’s report “The Millennials”, those who came of age at the turn of the 21st century are the most educated generation in American history and have the loan balances to prove it. Education is always a good investment and has historically made a huge difference in lifetime incomes, but what’s unknown is the impact of a generation whose average debt on leaving college is $20,000 – and much more for those who attended graduate school. Also consider that, for many, The Great Recession began at the same time they graduated and started their careers.

Millennials therefore have to reflect on some different strategies. Possibly, the only way this generation is going to avoid prolonging the education loan cycle is to start saving for their children’s education the minute they are born. Changes in IRS rules over the past 10 years or so have made saving for education more cost effective through 529 qualified tuition plans. I say more “cost effective” instead of “easy” because, as is the case with most programs that involve the IRS, there are rules and restrictions that must be followed. But the plans, available in all 50 states with each state’s program open to participants from other states, offer the ability for most to save after-tax dollars (in some states some of the money is pre-tax for state income tax) in an account whose earnings grow tax-free.

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Withdrawals are tax-free when used for educational purposes – and the definition of educational purposes is quite broad. The rules also are designed to give savings a jump start: anyone can contribute to an account. Individuals can contribute up to $13,000 per year ($26,000 for couples who file jointly) and the contribution can be accelerated to five times the annual exclusion amount ($65,000 for an individual and $130,000 for a couple filing jointly).

Some plans can be purchased directly and some through brokers. A good source of information is the College Savings Plans Network. Regardless of the plan, definitely consult with a tax and/or financial professional before you sign on the dotted line.

Now let’s think even further outside of the box. Sometimes we get trapped into coming up with solutions that are based on faulty assumptions. Traditionally, parents felt that if their children got accepted to a college or university, then they would find a way to pay for it. However, the price of higher education today and in the future may far exceed our children’s potential earning power. It is important to consider that brick and mortar institutions may not be the way to go. This doesn’t mean that they should skimp on educational quality, but choices today are available that weren’t there before. Consider respected institutions offering online curriculum or places like the Khan Academy, whose mission is to provide a free world-class education for anyone anywhere.

At Harvard Business School, I was honored to have Clayton Christensen, Disruptive Innovation Expert, as a professor. You can read further on his thoughts about changing education in The Innovative University: Changing the DNA of Higher Education from the Inside Out.

This content was provided by Transamerica Brokerage and did not involve the Kiplinger editorial staff.