Two hundred and sixty years ago, Ben Franklin wrote in his book The Way to Wealth, “an investment in knowledge always pay the best interest.”
Franklin’s statement still rings true today; The Bureau of Labor Statistics reports that the unemployment rate and average annual salary among those with just a high school degree was 4.1 percent and $37,960 in 2018, whereas it was just 2.2 percent and $62,296 for college graduates.
Of course, better employment and pay prospects are the result of what is indeed a very costly investment: The College Board reports that the current average annual tuition at public and private four-year universities stands at all-time highs of $10,230 and $35,830, respectively. Worse yet, these numbers are expected to continue growing.
The good news? Maryland recognizes the value of a well-educated workforce and offers two forms of college saving plans: the Maryland Prepaid College Trust (MPCT), a defined-benefit plan that allows you to save for future college tuition at today’s prices, and the Maryland College Investment Plan (MCIP), which is tied to a mutual fund investment portfolio. Both plans incentivize saving for and funding college and other forms of education by providing tax-deferred growth and tax-free distributions.
Preventing Student Debt
Because 529 plans make it easy for parents or other relatives to systematically invest money on a tax-benefited basis to help children fund their education, it follows that participating in a 529 plan helps more young people avoid becoming a part of the $1.49 trillion student loan debt crisis—or at least leave college with less student loan debt than the average graduate’s $31,172.
As Greg Klingler, a 529-investing father of two and the Director of Wealth Management at the Government Employees’ Benefits Association (GEBA) puts it, “The biggest benefit of a 529 plan is that every dollar it generates is a dollar that doesn’t have to be borrowed, and repaid with interest, by a young person.” Rather than being weighed down by debt as soon as they enter the real world, he says, “college graduates with little to no debt are able to apply their financial resources to their futures, like saving for a home or starting a family, and that’s extremely powerful.”
Indeed, some simple math provided by Michelle Winner, director of marketing for Maryland 529, demonstrates that beginning to invest in a plan during a future college student’s toddler days can easily save them (and you) close to half of out-of-pocket tuition costs. For example, if you set a goal to save $25,000 for college costs over a 15-year period and assume an average annual return in line with current estimates of 6 percent, you’d be investing about $15,500 over 15 years, or roughly $86 per month, to potentially build a $25,000 investment for college.
On the other hand, if you or your college student take out a loan for that $25,000, at the Federal direct undergraduate loan rate of 5.05 percent, you’d be looking at paying approximately $32,000 over ten years, or $266 per month, to repay that $25,000 of student debt.
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Unlike many other interest-bearing investments, 529 plans are designed to appeal to everyone.
They have no income, age, or annual contribution limits; are low maintenance, allowing you to “set it and forget it” by scheduling automatic deductions from your bank account or paycheck; can be gifted to any relative; and are guaranteed to be used for their intended purpose, as named beneficiaries have no legal rights to the funds, which remain under your complete control.
Plus, the Maryland 529 plan offers some perks that many states’ plans don’t, including:
- A deduction of up to $2,500 (or $5,000 for married couples filing jointly) in contributions per investment plan beneficiary per year from your state taxes if you’re the account holder(s).
- The same deduction as above if you’re simply a contributor or pair of contributors to a 529 plan—we’re looking at you, grandma and grandpa.
- An annual gift tax exclusion on deposits of up to $15,000 per individual per year (or $30,000 for married couples filing jointly).
- The ability to apply up to $10,000 in tax-free withdrawals to tuition expenses, per year and per beneficiary, at private, public, or religious elementary and secondary schools.
- The Save4College State Contribution Program, which provides eligible low- and middle-income families who apply between January 1 and June 1, 2020 with a $250 or $500 529 plan contribution from the state.
- The Funds Won’t Be Wasted
Both Maryland 529’s Winner and GEBA’s Klingler say there are two common misconceptions that might make some people hesitant to open or contribute to a 529 plan. First, many people assume that funds can only be used on tuition at colleges or universities in Maryland, meaning that your investment would be wasted if your child or relative chooses to venture beyond the Old Line State’s lines. In fact, 529 funds can not only be used at colleges and universities in any state, but also at any two-year community college, trade or technical school, or even international schools that have a federal school code.
Second, many fear that if a child receives a scholarship or chooses not to go to college it will render 529 investments pointless. In truth, neither situation will disappear your earnings, as your many options include using 529 funds to pay tuition and fees not covered by a scholarship, for example room and board or books; withdrawing unused funds, without the 10 percent federal penalty you’d otherwise face, up to the amount of the scholarship; transferring your account to another member of your beneficiary’s family; or, finally, withdrawing unused funds and paying the 10 percent penalty which, after many years of interest, might still result in you coming out in the green.
To enroll in a Maryland 529 plan, head to maryland529.com.