Could a 529 Plan Save You Money on Tuition?

The cost of attending college seems to be one those things that's ever increasing. So is there anything you can do to spend less money for tuition? With a 529 plan, you may be able to do just that. Read on to learn how these plans work to decide if it's the right money-saving option for your college expenses.

what are 529 savings plans

Understanding 529 Plans

It's never too early to start saving for higher education. One popular college investment option is the 529 plan. Investing in a 529 plan has many potential advantages, but there are a number of factors to consider. Learn how the two primary types of 529 plans work and what effect each can have on the price of college.

Prepaid 529 Plans

A prepaid 529 plan allows account holders to purchase units or credits for a future college student to be used for tuition at a public college or university (some private colleges offer their own independent prepaid plan). Prepaid plans guarantee that tuition costs will be locked in at the price they are at when the plan is set up. This can be a great way to save on college tuition, but some restrictions apply.

First, there's a limited enrollment period for most plans. Second, the plan usually only pays the full amount for in-state schools, so attending an out-of-state school may lead to additional costs. Third, funds from prepaid 529 plans can only be used for tuition and mandatory fees; although some plans let you add on a room and board option and use leftover funds to cover other approved costs. For future college students (and their families) who can live with these restrictions, a prepaid 529 plan's fixed tuition price can save a lot of money.

529 College Savings Plans

These plans vary by state, so it's important to do some investigating before committing to any plan. In general, though, students receiving educational funds from a 529 savings plan can attend any eligible school whether in-state or out-of-state. Plan holders can also create accounts in any state they want with no commitment to any school located there. Additionally, savings from these plans can be used on not only tuition, but also on housing, food, books and other college expenses. Contribution limits are often less stringent than those of prepaid 529 plans.

Financial Considerations

All monies deposited into 529 plans are typically exempt from local, state and federal taxes. Some states may also allow contributions to be deductible on your taxes. There are also no taxes for qualified withdrawal, making 529 plans a very appealing option for college saving. It is important to note that each individual 529 plan has different fees associated with it, so do your homework to make sure that the amount of money saved for college will exceed that extracted in fees. The College Savings Plans Network is a great online resource for comparing the 529 plans offered by each state.

When it comes to financial aid, if the account holder is a dependent student or the parent then the plan is an asset of the parent. Because a 529 plan is considered an asset, up to 5.64% of the money is counted against federal aid eligibility. For example, a 529 plan worth $10,000 will have a maximum of $564 deducted from a student's financial aid eligibility. The considerable tax benefits 529 plans offer typically offset this relatively small percentage, allowing investing students and families to save considerably on college costs.

Worried about the cost of higher education? Learn how much tuition should affect your college choice.

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