Meet the 529: Your Best New Collegiate FriendSubmitted by 215 Advisors LLC on February 6th, 2017
After the shock and joy immediately following the baby’s birth then all the other emotions set in as you mentally fast forward through the sudden expenses to be expected in the future...one of the biggest being the cost of education. Now, more than ever, a bachelor’s or a trade degree is essential for a future. As your baby grows and makes its way past Kindergarten graduation, to the awkward middle school years, high school sports and extracurricular clubs you’ll want to be saving so when that time assuredly comes where you help them set-up their dorm room or apartment that there will be no question how they can receive an education. And, you’re not alone in worrying about how to fund college; according to a Gallup poll, 73% of parents with children under age 18 worry about funding college more than any other financial concern.
With tuition and fees for the 2015-16 school year ringing up at $32,405 at private colleges, $9,410 for in-state tuition public colleges, and $23,893 for out-of-state residents at public universities those costs are looking mighty daunting, especially if tuition and fees continue to rise at the rate they have; even two-year in-state costs average $3,440 a year. Of course student loans are an option, but having as much independence from being in debt like 44 million other Americans paying an average of $351 monthly to loans (for borrowers aged 20 to 30 years) will put your family and student ahead in the financial game of life.
One financial tool to approach higher education affordability is with a 529 plan, otherwise known as “qualified tuition plans.” The plan’s name derives from the authorization from Section 529 of the Internal Revenue Code, and plans vary in their sponsorship from state governments or agencies to educational institutions. All 50 states (and D.C.) have at least one 529 option for residents. 529s are one of the most popular vehicles for college savings because they’re low maintenance and have a generally low effect on the student’s financial aid package than checking accounts. Plus, 529 savings can be applied to costs at a number of different education institutions, not just four-year universities, such as the theological seminary and trade programs like the culinary arts and beauty skills.
Benefits and Cons
You get to choose between two types of the plan: the college savings plan and the pre-paid tuition plan. Both plans are tax-advantage approach to paying for future education, but there are significant differences.
The college saving plan operates so the account owner can establish an account intended for a beneficiary (the student) to use to pay for eligible college expenses like books, tuition, and room and board. There are often several diversified investment options like bond mutual and stock mutual funds. As the student gets older and closer to going to college, the investments can be set to automatically shift to more conservative investment plans. When the student is ready to withdraw from the plan to pay for college expenses, the funds can usually be used at any higher education institution.
In comparison, pre-paid tuition plans are sponsored by state governments and require residency within the state. This plan allow the account holder to purchase elements education credits (essentially tuition) for use in the future at participating state college and universities. Only some plans, not all, allow for funds to be used for room and board or other college expenses.
A benefit to the pre-paid tuition plan is that the investments are guaranteed, compared to the college savings plan where mutual fund investments are not federally insured or guaranteed by state governments. Additionally, the pre-paid plan locks tuition costs in at the time of investment (a huge plus since tuition costs have risen have risen by 9% in the past five years for public four-year school, 13% at private four-year schools, and 11% at public two-year institutions). However, the college saving plan can offer more flexibility; enrollment is open all year and there are no age limits, compared to the pre-paid plans that have limited enrollment periods and age limits for the beneficiary.
A huge benefit of the 529 plan comes with taxes. Money in 529s are exempt from federal tax and most are also exempt from state taxes as well. Another prospective benefit in some states is the matching grant for investing in a 529, state income tax or other benefits, such as matching grants, for investing in a 529 plan; most of the time residency is a requirement. In a few states, residents are allowed to deduct contributions from any 529 plan.
Conditions to Know
Like all investments it’s important to know the fees, penalties, and loopholes (which is where a financial advisor can help). One major penalty associated with the 529 account is that you must allocate the money toward higher education costs or you will face monetary penalties and benefits loss. If you choose to invest in a 529 through a broker that will come with its own commission (or “load”) on top of the enrollment and admin fees associated with prepaid and college savings plans. Any sort of asset management associated fees and other expenses will depend upon the investment plan you choose, so consider each plan’s full scope.
The 529 plan does come into play when it comes to financial aid packages and your student fills out the Free Application for Federal Student Aid (FAFSA). To add to some minor confusion 529s count differently on the FAFSA dependent on whom holds the account, according to federal rules. If the account is held by the student or the student’s parents, the funds are defined as assets and savings in the plan can reduce the aid by up to 5.64%. If the plan is held by grandparents of the student the funds won’t be counted as assets but once used for college expenses it will need to be counted as untaxed income on the FAFSA and can reduce aid by half, meaning the amount the family is expected to pay would increase.
Take Stock of the Situation
It may be right for you and your potential college grad, or it may make more sense to dedicate investments toward your mortgage or paying off credit card debt. Before investing your hard-earned money into saving for college in a 529 meet with your financial advisor and review your financial goals and overall situation. Do your top-level research into the 529s available to you using U.S. News and World Report’s 529 Finder at http://money.usnews.com/529s.