Just because there is a recession going on does not mean college should be postponed. But it can be challenging to save for college tuition when economic conditions are so uncertain.
Many households have experienced unemployment and more family members have managed to keep jobs but with reduced hours or pay reductions. During a recession, part of a job is better than no job because there is always the hope the job could be restored to full-time once companies start hiring again.
In the United States there are programs that promote college savings. Called 529 plans, it’s possible to regularly invest money with a plan manager. The plans were created to encourage families to save for college over a period of time. The money can be used at the choice of college and the college does not have to be in the home state.
The independent 529 plan is a state plan that lets you prepay college tuition. Unfortunately the recession negatively impacted some of these plans. The Alabama Prepay a Child’s Tuition program (PACT) relied on investments to maintain adequate funds to cover future tuition expenses of participants. When the recession began, the PACT investment account experienced a large drop in value leaving inadequate funds in the account to cover tuition expenses for all participants. The account participants are currently working with the Alabama state legislature to find a solution to the problem.
That brings up an important point to keep in mind. The 529 plans have plan managers and funds are handled differently from state to state. The closer your child gets to college the less investment risk you should be willing to accept. Many of the 529 plans have an age based option that moves the money saved into safer investments once the child is within a year of starting college. Currently the IRS allows one investment change per year.
You can shop around for 529 plans and do not have to use the one offered in your state. Spending some time learning about the various plans, of which there are 80, can pay off in the long run. You must match your needs to the 529 plan.
There are some basic rules of thumb to keep in mind when considering a college savings plan. First is the act you need to save some amount every month. It is possible to set up automatic payments into a 529 tuition account. Some of the plans have minimums as low as $25 a month which most households can afford. Even if you hope to save more each month, getting started is often the hardest part. Developing a savings habit makes it easier to save over time.
Even in difficult economic conditions, it is possible to save for college. The one thing you should avoid doing is relying on retirement savings to pay for college tuition. Not only will you be withdrawing money that will probably be penalized, you are leaving yourself financially vulnerable.
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Tags: College Tuition, Economic
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