What Moms Need to Know About The 529 College Fund

Piggy bank with graduation cap on the shelf.

Have you heard of Ryan Hickman, founder, CEO, manager and operational employee of Ryan’s Recycling Company? At 3 1/2 years old, Ryan boldly told his father that he wanted to start a business collecting recyclables from around the neighborhood. According to CNN, Ryan now has 50 customers and earned over $11,000 in savings – which The Ellen DeGeneres Show once doubled – all by age 7.

What’s a little boy to do with over $20,000? Ryan wants to buy a full-sized truck, but his dad insists the money go to his son’s future college tuition. With that in mind, it’s easy to see that this heartwarming story points to an unsettling truth: Paying for college is hard. It’s so difficult, in fact, that approximately four years of work and a generous donation may only cover a single semester – right now. According to CollegeBoard, yearly tuition, fees, and room and board at a public four-year college rose from $8,160 in the 1976-77 school year to $20,090 in 2016-17. If these prices keep increasing, who knows how much college will cost by the time Ryan turns 18?

Luckily, many financial plans exist to make saving for school much less of a burden. One highly beneficial option is the 529 college fund. This plan comes with several incentives that encourage parents to start saving for college as soon as they can. That said, you should make sure other financial matters are squared away before investing in your child’s future tuition.

A piggie bank stuffed with money, wearing a graduation cap. The side of the bank is labeled "College Fund."College is expensive, but a 529 plan can help.

What is a 529 college fund?

Named after Section 529 of the Internal Revenue Code, 529 college funds are plans into which families set money aside for college. They’re operated by a state or education institution, and the funds inside are tax-free as long as they’re used to pay for qualified college expenses. Tuition, room, board, textbooks and even required software are all usually covered, but other things like health insurance insurance and transportation (for example, a plane ticket to campus) usually aren’t. In addition, some states even offer a full or partial income tax deduction or credit for money put toward the plan. However, if you do want to use the funds for something other than a qualified expense, you’ll have to pay normal taxes plus a 10 percent penalty fine.

Still, 529 funds are incredibly flexible. Most plans allow your child to attend a school in any state, and in fact, you’re generally free to create a plan in a state outside your current residence. You can also transfer the plans to another child, and there are no income restrictions or age limits. As a reminder, each plan has is own specifications, so be sure to research so you make the best decision for your family.

When should I open a 529 fund?

“Settle your other financial obligations before opening a 529 college fund.”

That’s the tricky question, isn’t it? As the mother of an infant, you might believe now is the perfect time; after all, it’s never too early to start saving. However, there are several financial obligations you should tackle before preparing for college. You and your child have a lot of life to live before tuition is due, and it’s important that you’re financially stable during that time. After all, even if you don’t have a 529 plan, you can still pay for college in other ways. The same can’t be said of retirement (to which you should be able to contribute 10 percent of your paycheck before worrying about school, by the way).

To help you determine when to start saving, use these helpful tips:

  • Get rid of your own student loan debt first. You’ll feel a lot less anxious about contributing to your child’s college fund if your own loans are squared away first.
  • Pay off high-interest loans like credit cards as soon as possible. According to an analysis from NerdWallet, the average household loses $1,300 a year in credit card interest. Settle your debt as quickly as you can, then put this money into your child’s 529 fund.
  • Establish a rainy day or accident savings account in case you’re put out of work. Unemployment or disability benefits aren’t always guaranteed, and they’re usually not enough to cover your normal bills, let alone your child’s college savings. Accumulate at least three month’s worth of expenses before opening a 529 plan.

Don’t let college worries take away from enjoying your baby’s infant years to the fullest. Make sure your other finances are in order first, then consider opening a 529 college fund.