5 Ways to Start Saving for College
The 529 College Savings Plan
The 529 plan is a state-run savings program that may provide state tax benefits to individuals saving for college costs. At
least one type of 529 plan is available in all 50 states, however tax benefits and program types vary from state to state.
Get the details about your state’s plan here.
Because 529 plans are treated as an asset of the donor rather than the beneficiary, it won’t impact your child’s eligibility for financial aid in the future.
There are two types of 529 plans: savings and prepaid plans.
529 College Savings Plans are investment accounts with a select number of mutual funds from which to choose. Keep in mind, the growth rate is dependent on the underlying fund’s performance. The plans are managed by either the state’s Treasury Department or outside investment companies hired by the state. Here are a few things to keep in mind:
- Most states provide asset allocation options based on the recipient’s age, with investments becoming increasingly conservative as the student approaches college age.
- Some states also provide income tax deductions for all or a portion of the donor’s contributions.
- The majority of states allow donors to save up to $300,000 per recipient, and rarely have income limitations or age restrictions.
- 529 withdrawals can usually be spent on room and board, as well as books and computer costs.
- Withdrawals not spent on education-related expenses are subject to a 10 percent federal tax penalty.
- Donors can transfer any unused funds to other family members.
Prepaid plans let you prepay all or some of the costs of tuition at the current tuition rate. The draw of this is that, historically, tuition rates have grown far in excess of inflation, so the prepaid plan allows you to lock in the current rate. A few things to keep in mind about this type of plan:
- Be cautious in picking this plan, as you are picking an exact school that you’ll be putting money toward. Unless you know which school your child will be attending (which, let’s be honest, who does when they’re babies!), this plan is probably not the right fit for you.
- Generally this is used to pay for tuition at public universities. The snag is that only about a quarter of states currently offer prepaid plans.
- Some prepaid plans are also available for private colleges through the Private Colleges 529 Plan. It’s currently accepted at 270 private colleges, so make sure to check this list if you’re thinking about starting a private college prepaid plan. You can use the savings at any of the participating colleges, and can start saving with as little as $25.
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