Save for College Expenses with a 529 Savings Plan
Reference & Education → College & University
- Author Jeremy Smith
- Published May 26, 2011
- Word count 479
The cost of a college education will depend on the school and a 529 savings plan will help a student pay for school. Community colleges tend to be the least expensive and state colleges vary in cost. Private institutions traditionally cost more. Regardless of the amount of the college expenses, the main objective is to be prepared. This college investment vehicle has tax advantages and was designed to encourage families to save for future education expenses for a designated beneficiary. It is offered by a state or educational institution with the goal of helping families save for future college expenses. The savings can be used to save for the expenses of colleges throughout the nation. The choice of school is not affected by the state of origination. In other words, a Virginia resident can invest in a California plan and then send their student to a college in Florida. Prior to initiating the plan, it is important to check the institution’s eligibility under the rules of the tax-deferred savings program.
Although investors are allowed from a different state, there are significant tax advantages and other benefits that include combining scholarship and grant opportunities, exclusion from state financial aid calculations and protection from creditors. All states have at least one 529 plan and it is the decision of each state whether it will offer one or more of the 529 plans. Because of this the requirements may vary by state. It is advisable to research the benefits and features prior to investing. Guarded with this information, a plan comparison can easily be completed.
The plan falls in two categories; prepaid and savings. The prepaid plan allows the purchase of tuition credits that can be used the future. The credits are purchased at current rates so performance is based upon inflation of tuition. Presently, 11 states offer prepaid tuition programs. The difference between the two is that the institutions of higher education administer the prepaid plan and the savings plans are administered by the state. Although the state is the administrator, the record keeping and administrative services are usually outsourced to another financial services or mutual fund company.
Additionally, a majority of the plans offer asset allocation options that become more conservative as the designated beneficiary gets closer to college age. Funds are intended to help pay for school expenses. These expenses include tuition, books, fees and supplies that will be used for study at any accredited college, university or vocation school in the United States. The funds may also be used for expenses related to study at select foreign universities as well. Monies can also be applied to room and board fees, provided that the beneficiary is attending school at least half-time. Qualified expenses do not include student loans or student loan interest. There are several benefits; the growth is tax deferred and contributions can be deducted from the owner's federal income liability.
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