Years ago a friend told me, “Paying for college is like buying a brand new BMW every year, but never getting to drive it.” Not only has it become one of my favorite quotes, but it motivated me to think about how I’d pay for my own children’s college educations. After some quick math, I realized that four years for both my daughter and son — with two years overlapping — would come to 8 BMW’s in six years. If my husband and I were going to be in a position to cover that, I knew we needed to start planning immediately.
When my daughter turned six years old, I enrolled in the Maryland Prepaid College Trust 529 Plan. I decided at the time to purchase the four year University Plan to pay for tuition and mandatory fees at any four year Maryland public college or university. I also chose a contract payment schedule of six years to spread out the payments.
But what if my daughter decided to go to an out-of-state school instead of staying in Maryland? Well, in that case, the contract pays the weighted average tuition of Maryland’s public universities. To claim my benefit, all I needed to do was submit an invoice from an accredited university showing what I paid for my daughter. For 2011, the fall semester payment amount was up to $4,177 for the University Plan.
Two years later when my son turned six, I opted for the Maryland College Investment 529 Plan. Unlike the Prepaid College Trust, there are no contracts to sign and no required payments. The plan offers a variety of investment options, ranging from bond funds to stock funds to balanced blends of both. By making annual contributions to his account, I’d hoped the amount of money I saved for my son would be comparable to the amount I’d prepaid for my daughter. The savings can be used to pay for any eligible higher education expenses — tuition, fees, room and board, books, course-specific fees, or supplies.
Both accounts were set up in my name as the owner and had my daughter and son respectively as the designated beneficiaries. As I’d hoped, the Prepaid College Trust has paid more in benefits than the original contract price and those gains are federal and state tax-free when used to pay college tuition and mandatory fees. I’m also able to deduct $2,500 from my Maryland Tax Return each year until I have accounted for the total contributions paid for the four year University contract. As for my son’s 529 savings plan, the contributions made are also deductible up to $2,500 annually, and you can carry over any unused deductions for the next 10 years.
As you can see, the 529 plans allow you to save for college in a tax-advantaged style. Such plans often consist of two separate ways to save:
- Through a pre-paid tuition program
- Through a college investment account
Your contributions are made on an after-tax basis, but if the funds are used to pay qualified expenses, your monies can be withdrawn federal and state tax-free. In other words, your money can grow tax free inside an investment of your choice.
If you’re interested, the Maryland Prepaid Trust Plan is administered by the State of Maryland and the College Investment Plan is managed by T. Rowe Price. Be aware that there are usually underlying fund expenses, annual program fees, and an annual account fee.
In her book, The Happiness Project, Gretchen Rubin observes that “The days are long but the years are short.” The same thing can be said of saving for your children’s college years.