In an increasingly competitive and technical world, a proper post-secondary education of some sort is more important than ever before. It’s also more expensive than ever before, so being able to invest wisely for education is an extraordinarily important thing. Here, we’ll be covering just the basics of investing for college.
First, generally speaking, stocks are the ideal investment for college savings. The reason for this is that tuition costs are raising faster than inflation, and bonds/cash simply don’t have the growth potential stocks do.
Second, consider special savings plans known as 529s. 529s (named after their section of the tax code), are essentially, IRAs for college. Your savings here are tax free. However, if you use them for non-approved purposes, you will end up paying ordinary income tax plus a 10% penalty on top of that.
529s come in two varieties: college savings plans and prepaid tuition plans:
Prepaid tuition plans essentially allow you to pay for tuition for a future student now, at today’s prices. Different plans allow you to pay for a certain number of years of school, or a certain number of credit/hour units. With prepaid tuition plans, it’s important to read the contract carefully, as some of them contain some fine print.
College savings plans are the other type of 529. These function essentially like a 401K or an IRA. You get different options on what type of investment to choose, and then your investments’ performance determines if your account grows or not.
If you choose to invest for education, keep in mind that you don’t necessarily need to cover all 4 years of college. Financial aid and student loans can help to make up the cost difference as well.