College and University Blog
College Tuition Savings Plan: Have Money for College with a 529 Plan
My daughter isn’t even two years old yet and I’m already wondering what the price of college will be when she turns eighteen. Whenever we slip a few quarters into her piggy bank my husband and I joke around about her “college fund,” but in reality setting up a savings plan for college is something that a lot of parents are concerned about.
Parents Shouldn’t Feel Responsible for All of their Child’s College Tuition
Last week I mentioned that financial experts are now telling parents that they shouldn’t feel completely responsible for paying for their child’s entire college education, and Forbes featured another article regarding the topic today. It seems that it’s become common practice for parents to dip into their retirement savings to help foot the bill for their child’s college tuition. Doing so can might seem like a quick fix, but it can actually wind up being a costly mistake.
Although they’ve been getting a bad rap in the last few months, student loans are still a great way to help pay for college if they’re used properly. As CNN Money puts it, “Your children will have more sources of money for college than you will have for your golden years, so don’t sacrifice your retirement savings.”
Teens are Saving Money for College
In October 2009, ABC News/Money reported the results from an annual survey performed by the online brokerage firm TD Ameritrade Holding Corporation: 62 percent of teenagers between 14 and 19 admitted to saving money for college. Joseph Peri, CEO of the nonprofit Council for Economic Education, commented at the time that "It’s a pleasant surprise that we’re seeing young people paying that much attention to the importance of this issue.”
Things seem to be improving further yet. A press release dated August 3, 2010 announced that this year, 66 percent of teenagers surveyed by TD Ameritrade are saving their money to pay for all or part of college! The survey also found that today’s young people are more focused on saving for college than teens in previous generations were.
A disturbing bit of information provided by the survey results, though, is that 70 percent of today’s teens and 57 percent of adults have never heard of a 529 plan.
Save for College with a 529 Plan
A 529 plan is a savings plan used to set aside funds for future educational costs. The plan is named after Section 529 of the Internal Revenue Code, and it’s recommended by financial planners to parents who want to help their children with college even though they may not be able to cover everything when the time arrives. The plans are typically offered by the state in which you reside, although most states allow out-of-state investors to open 529 plans. If your child is planning to attend college in another state, you could open a plan in that state.
There are two types of 529 plans: prepaid and savings. Prepaid plans allow you to purchase tuition credits at today’s rates to be used in the future, meaning that the account’s performance is based upon tuition inflation. Savings plans are different because all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. They can lose money.
As long as the child who is expected to attend college is listed as the plan’s beneficiary, anyone can open a 529 plan—parent, grandparent, aunt, uncle, or other relative. Ideally, the 529 plan should be opened as soon as the child is born. (I guess I missed that boat on that one, since my daughter will be two in a few months.)
Advantages of a 529 Plan
- CNN Money explains that qualified 529 plan withdrawals—taking money out to pay for tuition, fees, books, supplies, equipment or any other approved item required for study at any accredited college, university or vocational school—are free of federal tax.
- Most states also offer state income tax deductions for all or part of the contributions made to the plan. The principal, or the money in the account, grows tax-deferred and distributions for the beneficiary’s college costs are also exempt from tax.
- The 529 plan is a very easy way to save for college. Once it’s set up, the 529 plan is managed by the state treasurer’s office or an outside investment company that was hired to manage the account.
- The plan owner maintains control of the account. With few exceptions, the named beneficiary has no rights to the funds, and most plans will allow you to reclaim the funds for yourself—if the child decides not to attend college, for example.
- There are no income limitations or age restrictions, which mean that you can start a 529 no matter how much money you earn or how old your beneficiary is.
Disadvantages of a 529 Plan
- 529 savings plans may experience losses, just like any other investment.
- The earnings portion of money withdrawn from a 529 plan that is not spent on eligible college expenses will be subject to income tax and federal tax penalties.
- The 529 account is considered as an asset, meaning it may affect the student’s eligibility for financial aid.
If it’s too late to open a 529 plan but you would like more information on paying for college, be sure to visit StateUniversity’s online College Financial Aid Guide!
Melissa Rhone+
Melissa Rhone earned her Bachelor of Music in Education from the University of Tampa. She resides in the Tampa Bay area and enjoys writing about college, pop culture, and epilepsy awareness.