Saving Options For College: Part 1

A 529 Plan is a tax-advantaged savings plan used to encourage saving for future educational costs. In legal terms, they are referred to as qualified tuition programs. Generally, these plans are sponsored by states, state agencies, or educational institutions. You have two types to choose from, which are prepaid tuition plans and education savings plans.
Prepaid Tuition Plans:
Prepaid tuition plans increase in value along with the rates of college tuition. This plan includes the expense of room and board. This locked in tuition at the current rate gives students’ parents peace of mind. There is a higher rate of return on the investment than a bank’s savings account. It is also comforting that the plans involve no risk to principal. Prepaid tuition plans are run by state governments and based on the enrollment-weighted average of in-state public college tuition rates. You can only withdraw the purchase credits at participating colleges, and if used at a different college they’ll be less.
If the student decides to attend an out-of-state or private school, the plan will cover the average in-state public school tuition; anything over will have to be covered by the individual. Prepaid tuition plans are exempt from federal income tax and can be exempt from state income taxes. There may be an application fee and ongoing administrative fees when opening a 529 plan. This plan is transferable in the event the child decides not to attend college. Prepaid tuition plans are safe, affordable, tax-exempt and are a convenient choice for families who want to save for their children’s education.
Education Savings Plan:
Education savings plans allow you to set aside money for higher-education expenses including, tuition, room, board, and supplies. This plan isn’t restricted to only in-state school, it can be used all over the United States and even at some non-U.S. colleges. Education savings plans can also be used to save for elementary and secondary schooling. If the beneficiary wants to withdraw the money, it must be used for qualified education expenses otherwise investment earnings will be considered taxable income and an additional penalty of 10% of the earnings will be applied.
Savers with education savings plans will typically choose amongst an array of investment portfolio options. All of these savings plans are sponsored by state governments. Unlike the prepaid tuition plan, there are no guarantees. State governments do not guarantee investments, meaning the education savings plan may not make any money or could even lose the money invested. Once an investment portfolio is set up, it should not be switched frequently. Investors may only change the investment twice per year or in the event the beneficiary changes.
Education savings plans may charge an application fee, annual maintenance fees, ongoing program management fees, and ongoing asset management fees. The asset management fees will depend on the investment options you select. If you purchase this plan from a broker, there may be additional fees included.
Starting early with the right plan can benefit you when the time comes to send your child to school. The more you save for school, the less debt will come from attending a higher education institution.