Upbeat Wealth Founder Mike Turi joins Great Day Louisiana’s Malik Mingo to discuss saving tips for education goals and Louisiana’s START 529 Plan.
Great Day Louisiana: Saving Strategies for College
Budgeting for Higher Education Costs
Knowing what it will cost remains the trickiest part of determining how to save for college. You’re simply guessing how much college will cost 10+ years out and how much funding your child will need. Will they go to college? What type of school? Will they receive scholarships and grants? Here’s what the current landscape looks like per CollegeBoard.org:
2023-24 National On-Campus Average Cost of College (Tuition, Fees, Housing, Food)
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Public Four-Year In-State: $28,840
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Public Four-Year Out-of-State: $46,730
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Private Four-Year: $60,420
Historically, higher education costs have increased faster than other goods and services. If core inflation is running at 2-3%, education inflation is running between 5-8%, depending on what you are measuring. If we adjusted the public four-year in-state tuition of $28,840 for 5% annual inflation over the next 18 years, the cost of college would increase to $69,407. While you will never eliminate sticker shock, this highlights the importance of having an intentional savings + investing plan to keep up with inflation.
Louisiana’s START 529 Plan
The most tax-efficient college savings vehicle is the 529 plan. In Louisiana, it’s called the START Saving Plan, and there’s a ton of great information on their website, startsaving.la.gov
A 529 plan is a bit like a Roth 401k for higher education costs. Money goes in after-tax, grows tax-free, and is eligible for tax-free withdrawals for qualified expenses such as tuition, fees, books, and room and board.
Additionally, Louisiana offers the following benefits for residents:
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State Tax Deduction: Married couples filing jointly may deduct deposits up to $4,800 per year per beneficiary
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State Match on Contributions: There is an “Earnings Enhancement” based on household income that ranges from 2 – 14%. For example, a household making $70,000 would be eligible for a 6% earnings enhancement. Therefore, if they contributed $10,000 to an LA 529 Plan in 2024, they would receive additional funding of $600.
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Low-Cost Investments: Remember to choose your investments when setting up a 529 plan, as LA has a great line-up of low-cost Vanguard funds to choose from, including “age-based” options that will rebalance automatically from aggressive to conservative as your child gets closer to college.
While I always recommend investing a portion of your savings in a 529 plan for the above reasons, you might consider diversifying your savings toward a boring old taxable brokerage account, especially early on when there is a great certainty of your child’s track. This will allow you added flexibility if there is excess savings relative to your funding needs.
What happens if my child ends up not needing the money?
Withdrawing funds from a 529 plan for non-qualified educational expenses carries tax consequences and penalties. Generally speaking, you’ll be subject to ordinary income taxes and a 10% withdrawal penalty on the earnings portion. Thankfully, recent legislation has added flexibility to avoid these penalties. To avoid income tax on earnings and penalties, parents have the option to:
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Change the beneficiary at any time to another child or grandchild for their benefit
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Rollover funds from a 529 plan to a Roth IRA for a beneficiary. Restrictions apply, such as a minimum holding period, an annual maximum, and a lifetime maximum.
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Withdraw up to the amount of a tax-free scholarship/grant to avoid penalty but not income tax on the earnings.
