With growing concern expressed by such divergent personalities as Mark Cuban and Elizabeth Warren of the problems of student debt, it pays to start saving for college even while your kids are still in diapers. However, as Jim Cramer of CNBC’s Mad Money says, it is best for parents to make sure they have enough for retirement so the children they fund don’t end up having to support their parents.
The best way to get funds ready for college is the 529 plan, but rules vary according to state. The general principles of 529 plans across the country are uniform. One kind of 529 plan allows parents to hedge against tuition inflation by purchasing tuition credits at current prices. However, Cramer prefers the 529 savings plan. The disadvantage of the 529 savings plan is that parents can’t choose their own investments but are given a menu of mutual funds to manage the money. While Cramer is known for encouraging viewers to pick their own funds, he is willing to compromise in this case. He recommends a fund that reflects the S&P 500, like the S&P 500 or the Vanguard Total Market Fund. Individual investors can invest a maximum of $14, 000, but couples who file taxes jointly can contribute $28, 000 per year. Grandparents can also put money in. One advantage is that, even though there is an annual limit to giving, it is possible to frontload a lot of money for up to 5 years in advance.
One can expect to earn 8% per year from such a plan, which means doubling the initial investment in less than ten years.