Pension Protection Act of 2006

With the passage of the 2006 Pension Protection Act in August and the President’s signing of the Act, the tax treatment of 529 Plans, originally set to expire in 2010, has been made permanent.

We discussed this briefly in last month’s letter, so I thought this month we could cover some more ground within the college funding world that this Act’s passage makes possible. This will be familiar ground for most, but I think we parents of future college students need to be reminded of these things sometimes.

It will always be cheaper to save for college than to pay for loans. If you’re in the position of most folks – with enough assets that you figure your child won’t be considered for financial aid – then it pays in spades to save now. If you saved $150 a month for 8 years at 8% interest, you’d have just over $20,000 in your account. If, on the other hand, you didn’t save that money and had to borrow $20,000, paying it back over the same 8 year period at 7% interest would require monthly payments of $273 - $123 dollars a month more. If the rate on the loan was 9%, the payments would be $293 a month, almost double the amount if you would have saved.

The best time to start is yesterday. Actually, the best thing to do is don’t delay. If you started saving for college when your child was first born, accumulating $20,000 when the child is 18 only requires $42 per month, assuming 8% interest. Waiting just five years, that payment increases to $74 per month. Wait until your child is 13, when you have only five years left in order to accumulate $20,000, you’d need to make savings payments of nearly $273 each month.

Choose the right plan. The differences between your choices for 529 plans alone are mind-boggling, but you need to consider other options for savings as well. Some will provide tax benefits, others may not, but this is a critical choice to make as you make your savings plan work for you.