Saving for your child’s college expenses? Me too! And, believe me, we are not the only ones taking our seats on this boat.
With the rising cost of tuition at colleges and other post-secondary education institutions, more students have been driven to take student loans to pay for their education. As a result of this increase in student loans, according to MarketWatch, $3,055.19 in student loan debt comes due every second in the United States!
With student loan debt at over $1.2 Trillion (not a typo- I wrote Trillion), I am personally investigating every way possible to pay for my child’s college education without being dependent on student loans. One of the options I’ve been exploring is a 529 Savings Plan.
What is a 529 Plan? Basically, a 529 Plan is an education savings plan operated by a state (as an investment savings plan) or by an educational institution (as a prepaid tuition plan). Each plan type is designed to help set aside funds for future college costs. States may offer both types of plans (prepaid tuition and a savings plan) but a qualified education institution can only offer a prepaid tuition type plan.
A State Plan: Each state has its own plan and each has unique features. You are not required to purchase the plan from the state in which you live. Be sure to compare the various features of different plans within and outside of your home state. The market is competitive, shop around, you may find another state’s plan is more appealing to you.
A college saver establishes an account for a student to pay for eligible college expenses, which include: tuition, room and board, mandatory fees, books and computers. In most plans, the choice of a school is not affected by the state your 529 savings plan is from.
The account holder typically chooses from several investment options for his or her contributions, which the college savings plan then invests on their behalf. Investment options can include stock mutual funds, bond mutual funds, and money market funds.
Here’s a link I found that lists top performing 529 savings plans.
A 529 Prepaid Tuition Plan: A prepaid tuition plan basically lets you pre-purchase tuition for use in the future. There are two types of prepaid plans: contract plans and unit plans.
A contract plan promises to cover a predetermined amount of tuition expenses in the future, in exchange for your lump sum or periodic contributions.
A unit plan allows you to purchase a certain percentage of units or credits and then it guarantees that whatever the current percentage of college costs in units are now, that the same percentage will be covered in the future.
Hypothetically, as an example, if 100 tuition credits are required to fund one year’s worth of tuition at your chosen University today, and the cost for those 100 credits is $9,000, you would pre-purchase those 100 credits for $9,000 today. Then, in 12 years, when your child begins college at this school, you will have already paid for the entire first year of tuition. (Even if tuition costs may have risen to $18,000 per year by then.)
Tax and Transfer Benefits-Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expense. In many cases, any unused funds can be transferred to another beneficiary. The account holder can do this only once a year. Other qualified beneficiaries can include siblings, cousins, grandchildren, or even a parent.
There is a penalty if you withdraw funds from a 529 Plan that are not qualified educational expenses. A 10 percent federal penalty will apply on the earnings portion of the withdrawal (a state penalty may also apply). Also, the earnings portion of the withdrawal will be subject to federal and state income tax.
Check out this link to the IRS that answers more questions about 529 Plans.
My next step is to consult a tax professional or financial planner- to make sure I understand all the details of a 529 plan. I don’t know if a 529 is for me but it is nice to know that I have options that are not tied to scholarships, grants, or loans for my child’s educational future.
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