Paying back student loans can be somewhat of a strain. Therefore, if you are just now beginning your own family, you can’t help but consider the many ways you can provide for their college education.
One of the popular ways to save for college is by making use of a 529 College Savings Plan. The state plan provides an advantageous way to save for higher education and is designed so the saver has more control of his or her money.
Types of 529 College Savings Accounts
A 529 college plan features regular savings and prepaid plans. Prepaid plans permit you to buy tuition credits that can be used when your child begins college.
529 College Savings Plans, on the other hand, are generally made up of mutual funds that influence income growth. Investments are altered periodically, with funds in the account becoming more conservative as the beneficiary gets older.
Money that is taken out of the plan for college costs is used for study supplies, such as books, pencils, and paper at accredited schools and colleges. Money from a 529 College Savings Plan can also be spent on student housing if the beneficiary is considered at least a part-time student. Savings from a 529 that is used for any expense other than college-related costs can be assessed a penalty for early distribution and be taxed.
Tax Benefits of 529 College Savings Accounts
Nevertheless, the benefits are substantial if you concentrate on saving for your children’s education. Even though the amount you contribute yourself cannot generally be deducted from your taxes, there are states that allow deductions on a portion or the entire amount you put into the plan.
Regardless, the principal is tax-deferred and any college expense that is paid with the savings in the plan is tax-exempt. What’s nice about a529 College Savings Plan is the latitude and authority you possess with respect to contributions.
The named beneficiary has no privileges in this regard. You can even make a distribution to yourself; although the part of earnings of the amount withdrawn will be assessed a penalty and be taxed for income tax purposes. The plan provides tax-exempt money for educational purposes provided that the money is used solely for that reason.
Other Benefits of 529 College Savings Plans
In addition, 529 College Savings Plans typically feature the ability to invest smaller contributions than other investments. Also, if your child opts to take another route other than college, you can transfer the money to another person in your family and not have to pay a penalty.
You can even shift the money in the account to yourself and use it for your own educational needs. If your child receives a scholarship, taxes, and penalties on 529 College Savings Plans can be waived or reduced on the account.
529 College Savings Plans are a great way to save for college education expenses. The tax benefits that parents can enjoy are tremendous. And, the ability to invest the funds in mutual funds allows the college funds to grow and benefit from compounding interest make the plans a great option for parents.
Good post Hank. I would say that 529s are good under certain circumstances but taking into consideration the fact that most parents don’t have enough to pay cash for college can result in some unnecessary consequences. Even if we take out the risk factor (which is huge in of itself – some people took upwards of a 30% loss in recent years) there’s a particular issue that virtually every parent is not aware of until it’s time to fill out their FAFSA form.
Here’s the issue, 529s count against them when trying to qualify for student loans. That’s right. They don’t have enough to pay cash and what they have counts against them. What if they saved the exact same amount of money and enjoyed the growth with NO risk and then when it was time to qualify for student loans they qualified for more simply because their education fund was sitting in a different “pocket”.
I’ve personally seen individual’s with much larger wealth come to the table with significantly less money for college than your average American. It has nothing to do with privilege but instead strategy. Also, remember, that if you qualify for a lot aid (which is hard if you have 529s) then you also qualify for MORE Gift Aid…and does Gift Aid have to paid back? NOPE!
I have personally seen Parent A sending his/her child to Denver University – DU (private with a COA of around $50k) pay less than Parent B who “can’t afford a private school” and sends his/her child to CSU (Colorado State University which has a COA in the low to mid $20k). It’s all strategy and it’s always the parents with 529s that pay more…it’s true.
Kelly,
I think that you are potentially leading people down the wrong path. Not saving for college because it will lessen the degree that you will receive need based financial aid loans is not the best advice. The need-based financial aid treatment of family assets depends on whether they are owned by the student or the parent. Parents can find information about finacial aid elibility from the Dept. of Education’s site, http://studentaid.ed.gov/students/publications/student_guide/2010-2011/english/main.htm And, another great site for specific information is http://www.finaid.org/
The Expected Family Contribution (EFC) is calculated from the information you report on the FAFSA and according to a formula established by law. Your family’s income (taxable and untaxed) and assets are considered in determining your EFC. Your family size and the number of family members who will be attending a college or career school are also considered. Student assets are assessed at a flat rate of 20%. Parent assets (which most 529 Plans are considered) are assessed on a bracketed scale with a maximum rate of 5.64%.
Need based financial aid are for those parents who have not done the proper planning and investing through excellent options such as the 529 College Savings Plan.
“Not saving for college because it will lessen the degree that you will receive need based financial aid loans is not the best advice.”
I totally agree and I NEVER made the claim for individuals not to save. I challenge WHERE they save. A 529 owned by the child or the parent counts against them. What if Parent A saves in a 529 which effects their EFC and Parent B saves the EXACT same amount of money in a tool that does not effect the EFC, wouldn’t Parent B be in a better position?
They certainly would because they would have a lower EFC and also qualify for more Gift Aid. Absolutely no difference in saving amount.
Truly, if another tool exists that allows you to save the exact same amount of money, helps you pay less for college, and has no penalties or government intervention then wouldn’t that be worth exploring?