Inflation Goes to College

By: Barney and Pendleton Financial Group Last Updated: October 7, 2009

Over the past 10 years, tuition and fees have grown more than 4% faster than the rate of general inflation at public four-year colleges and more than 2% faster than inflation at private four-year colleges.1

That’s pretty scary stuff, but it doesn’t have to be the end of your dream to see the kids (or grandkids) go to a college of their choosing. You have a friend with the answers to this test: the Section 529 savings plan.

Take Some Notes:

Two common obstacles to investing for a long-term financial goal are taxes and inflation. You’ve just read that inflation is a big problem on campus, but what about taxes?

Section 529 plans are state-sponsored investment vehicles designed to help parents accumulate money for college. Any investment earnings accumulate on a tax-deferred basis and can be withdrawn tax-free as long as they are spent on qualified higher-education expenses (such as tuition, fees, room, board, and school supplies). Tax-free investment earnings could go a long way toward helping families beat inflation and achieve their college savings goals.

There are no income limits for 529 plan donors, who can contribute up to $13,000 a year per student ($26,000 for married couples) without incurring gift taxes. It is also possible to contribute $65,000 ($130,000 for married couples) in a single year, as long as the donor doesn’t give any other gifts to the student for five years.

As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also a risk that the plan investments may lose money or not perform well enough to cover college costs as anticipated.

The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because the plans can vary significantly from state to state. Also note that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.

Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing.