The previous generation grew up with the dream of getting accepted to their preferred university. Today the dream seems to be coming out of school without the crushing debt load that stifles post-collegiate life. According to Student Loan Hero, we now have 44.2 million Americans with averaging $39,400 of student debt for a whopping total of $1.48 trillion owed. The growth rate of debt has been increasing every year.
Anytime you acquire debt, you are borrowing from the future to invest in the present. If that is a business buying a building or equipment, they do it because ostensibly they believe the current investment will outweigh the debt owed in the future. A student is no different. The wager is the education will pay off in the future in terms of excess income relative to those that don’t make the investment in education. For some that idea works and for others it does not.
For the first time since the data has been tracked going back to the early 1970’s, individuals with a high school diploma are seeing faster income increases compared to those with a four year degree. And they don’t have the debt. That’s another story.
529 plans are a tool the parents and grandparents can use to put dollars away to help offset the loan burden. An investment can be made and the earnings grow tax-free if used for higher education expenses. 35 states offer tax incentives for individuals investing for college and Indiana is one of them if you use the College Choice plan.
The money can be used for more than tuition which is important. You can use your 529 account assets for many qualified higher education expenses, including tuition, fees, computers, and in some situations even room and board.
One challenge, in my opinion, is the over-funding of a 529 account. When America puts the chips on the table, we thought we would be out of oil by 1980 – and they weren’t wrong! We would have been but we created technology to solve the problem. Today, we face similar challenges with health care and higher education. I can’t help but to believe we will find a solution to suppress the growth rate of the costs similar to what is happening at Purdue as they’ve frozen tuition costs for several years.
Funding a 529 plan makes sense. If you use the College Choice plan in Indiana, you can receive a tax credit of up to $1,000 on a $5,000 contribution. That is per household not per beneficiary so the parents and the grandparents can both get the deduction if both contribute. Keep in mind it is a tax credit so if you don’t owe the state (you could have already paid the tax via withholding out of your paycheck) then the credit isn’t helpful. We suggest that you put in the $5,000 a year when you can. The credit amounts to a 20% return and that is hard to beat in this low rate environment we find ourselves in.
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