Guide to Saving for College
When it comes time to think about paying for college, the most common topic of discussion is financial aid. Grants, scholarships and student loans take up much of the college conversation, but students also need to consider their own contributions to their college fund. The more money you or your family can invest in your college education, the less dependent you will be on highly competitive scholarship and costly student loans.
Saving for college can be difficult, and college-bound students have a limited time to earn money earmarked for their tuition fund. However, parents with the the right degree of foresight can make a great contribution to their child's college fund in the form of a 529 Savings Plan.
A 529 Savings Plan is designed to help families save money for future college education expenses. These plans can be categorized as either prepaid plans or savings plans. A 529 Savings Plan works in much the same way as a 501k plan. A family's financial contributions are invested in either mutual funds or other similar investment opportunities. The value of a 529 Savings Plan will react to the state of the market, and will increase and decrease depending on the chosen investments.
A 529 Prepaid Plan is a savings plan that allows families to prepay part, or all, of their child's tuition costs over time. These plans usually apply to a specific in-state college or university, and prepaid tuition is applied directly to that institution .
A 529 Savings Plan allows parents to save for their child's college education over a long period of time, reducing the initial burden on the family pocket book and providing their college-bound student with a tidy nest egg. Parents can consider it an easy investment in their child's future.
529 Savings Plans offer participants a number of attractive benefits, not the least of which is a tax break on all accrued interest and investment returns. When the time comes to withdraw the money to pay for tuition, no part of the funds applied to a student's college costs are Federally taxed. The entire amount of your 529 fund is available for tuition costs, with no loss or penalties.
529 participants also have total control over their savings plan. Children are not able to access the account with their parents permission, and only funds authorized by the account holder can be disbursed according to the account holder's wishes.
529 Savings Plans are flexible and low maintenance. Once you have applied for, and opened a 529 account, your contributions can be automatically deducted from your checking account, allowing you to relax and let the savings grow until the time comes to use it for college. Participants will also find it easy to modify their accounts, or move them from one state to another.
If there are any potential problems with 529 Savings Plans, it is that there is no guarantee associated with any of the investment dependent plans. Money placed in 529 investment savings plans are subject to the constantly changing market conditions, and the final amount in your account may not be what you hoped to have accrued. These risk based savings plans must be considered carefully. While the payoffs can be more than you hoped for, they can also be less than you need.
The prepaid tuition 529 plan is an alternative to the risk-based 529 Savings Plans that rely on investment returns to build a college fund. These plans allow parents to prepay their child's tuition costs at an in-state university, while locking in prices at the current market value. For example, when you pay a quarter of the costs of current tuition at a particular state university, it will retain that value when the time comes for your child to attend college. Regardless of inflation or changes in college fees. The amount of money invested in a prepaid 529 plan will always adjust to current tuition rates.
The real main benefit of the prepaid tuition form of the 529 is that parents of college students get to preserve the current tuition rates so when their child goes to college, they will have paid significantly less. Savvy parents may wish to invest in a tuition plan during slight economic recession because the tuition rates general drop during this time. If you begin your prepaid 529 when tuition costs are low, you are locked into those lower rates.
Parents investing in prepaid tuition plans can also be assured that they remain in charge of their 529 account. Students are not allowed unauthorized access to any of the money in a 529 Plan, so parents can be sure that all of the savings are going to tuition costs alone. Prepaid 529 Savings Plans also provide lucrative tax breaks, with all money contributed to the savings plan being exempt from Federal income tax.
It should be noted that some states are reducing the availability of Prepaid 529 Savings Plans as a reaction to the ever increasing costs of college tuition.
Each state has it's own version of the 529 Savings Plan, so it is important to do some research to find precisely what plans may be available to you. Parents interested in 529 plans should also note that they can start a 529 account in any state that they wish, not just the state in which the family resides. If your state does not offer a tax deductible plan, or if you prefer to send your child to an out of state college, you can open a 529 in the state that you find most suitable. Take the time to compare plans. Which state offers the lowest fees? Which plan is more flexible, and provides the safest return on your investment? It is vital to make an informed decision when considering any 529 Savings Plan.
Parents can do a lot to help their children find the money needed to go to college. With the proper amount of foresight, and the right savings plan, parents can provide a substantial college fund for their child's future. 529 Savings Plans offer an excellent return on investment, and are one of the best ways to save for college.