Higher Education, Inflated: How to Combat Rising Education Costs with a 529 Plan

Let's take a look back at the year 1985. The first Nintendo Entertainment System debuted, Back to the Future was a blockbuster hit, Calvin and Hobbes first went into print…and college was a very affordable $4,563. Now, that's in 1985 dollars. Adjusted for inflation, the actual cost was more like $12,166, which is still far short of the average today - $26,903.

College costs increase year to year, and inflation makes those changes that much more dramatic. The cost of attending a four-year college or university these days makes the idea of hopping in your time machine and heading back to the 80s seem very appealing. But before you start rigging a lightning rod up to the clock tower or revving your DeLorean up to 88 mph, let's take a look at a special savings account that can cut the cost of a college education dramatically. It's called a 529 account, and if you have youngsters who might one day want to attend college, it's a fantastic investment tool.

The History of 529

Back in 1996, Congress enacted Section 529 of the Internal Revenue Code. Section 529 states that a savings account can be established to pay for tuition, fees, books, and some room and board costs, with no federal taxes being assessed against the total amount saved, as long as those funds are used for educational purposes. Every state in the United States (except Wyoming) offers a 529 program that parents and guardians can set up for their kids to cut down on the cost of college. In 2017, the tax code was changed again to allow 529 funds to be applied to K-12 expenses as well.

Setting up a 529, for kids, for grandkids…or for yourself?

Yes, you're reading that correctly. If you're 18 or older, you can set up a 529 account for your own education! The beneficiary of a 529 account can be any person of any age, as long as they have a Social Security number or Tax ID.

Who can contribute to your 529? Anyone, really. Grandparents, family members, friends, or even your co-workers or church family can contribute to an open 529 account. No matter where the funds come from, they can be used for educational purposes at the public or private school or university of the account holder's and beneficiary's choice.

Taking a pin to inflation

Why is a 529 account a great way to hedge your bets against inflation? There are a number of reasons. For starters, 529 accounts are tax-advantaged, meaning that they don't get taxed no matter how much they grow, as long as you spend them on education. Assuming an average inflation rate of ~ + 3.8% every year, you'll be happy that the money you're saving isn't getting taxed, and (depending on your state's tax code) might even be tax deductible.

Some 529 accounts offer a more substantial rate of growth. Depending on how well you invest, you may see that the initial investment and your continued contributions actually outperform other long-term savings investments you set up for yourself, meaning less pain when graduation day arrives.

In addition, because 529 accounts welcome external contributions, you can encourage family and friends to contribute to major events in your child's lives - birthdays, holidays, first communions, good report cards, making Eagle Scout, quinceanera, Bar or Bat Mitzvahs - the list goes on, and the savings go up as your child grows. In that way, even the smallest additions to the account can help offset the impact of inflation in the long term.

By now, it should be easy to see that setting up a 529 account is a great way to save for college or to help manage the cost of a K-12 education. You can sleep better knowing that inflation is just a number and, while it's not very fun to have to consider, it's nothing to be afraid of if you plan accordingly. You can add a little money month-to-month, maximize your growth, and reach out to your "village" to help set you up for success. Next thing you know, your young ones will be graduating, or getting their doctorate…and maybe even figure out how to get that Flux Capacitor working.