Do you have $36,000 to attend college this year? What about $10,000? With the average American having less than $4,000 in savings, odds are you don't have a plan to save for your child's education.
In this article, we will look at the following:
Reasons why to start saving
Types of College Saving Plans
How the plans work and who can use it
Best & Worst State Plans
According to CollegeBoard, the average private nonprofit four-year tuition and fees in 2018 were $35,830 while public four-year tuition and fees were $10,230.
If you’re like many households hoping to receive a scholarship, then recognize that only 0.3% of the population enrolled as a full-time student at a four-year college received enough money to cover the full expense of college.
Also, “only about one in 10 undergraduate students in bachelor’s degree programs wins a private scholarship, on average about $2,800 a year". It is for this reason and not having any money saved, that I enrolled in the military...to take advantage of the G.I. Bill. This article isn’t about enrolling your child into the service just so he or she can attend college one day but it is to educate you on how the 529 College Savings Plan works: who can use it, what are the fees, taxes, and penalties, and much more so you can make wise decisions and properly plan for your or your child’s future.
The formal name of this program is Qualified Tuition Programs but named after the 26 United States Code (USC) Section 529. The public just calls it a 529 plan; yet, the 529 College Savings Plans consists of two types of plans. These plans are Education Savings Plans and Prepaid Tuition Plans.
The College Savings Plans “allows earnings to grow tax-deferred and withdrawals are tax-free when used for qualified education expenses”. I’ll go into what is classified as “qualified education expenses” shortly or just skip down to read about it. A Prepaid Tuition Plan is exactly what the names claims it to be. It allows “parents, grandparents, and others to prepay tuition at today’s tuition rates at eligible public and private colleges or universities”.
This plan saw a positive reform change during December 2017 allowing the 529 to benefit not only college students but allowing parents to use the plan towards elementary and high school expenses as well. “This will expand the options parents have to educate their children since they will see some tax benefit if they chose to send their kids to private school.”
The 529 plan allows money to be used for education expenses that have tax advantages. Not all plans are created equal and must meet the Internal Revenue Service’s (IRS) definition of “Qualified”. The IRS defines it as “amounts paid for tuition, fees, and other related expenses for an eligible student” and Congress defines it as “program established and maintained by a State or agency or instrumentality therof or by 1 or more eligible educational institutions" (read more).
Anyone can set up a 529 plan for a friend, family member, or their self. So as a good uncle, I am allowed to set up a college savings plan for my nephew, niece, son, and daughter while naming anyone with a social security number as the beneficiary. The best part of it is that you are not limited to how many plans you want to set up...well, you are limited by the amount of money you have at the time but the IRS doesn’t limit how many plans you want to start. Just don’t go broke trying to play Good Samaritan and setting everyone on your street block up with a 529 plan.
A great benefit of these College Savings Accounts is you can change the beneficiary to another person without tax penalties. For instance, if you have two accounts, one for each child, and one child is enrolled in college while the other refuses to go, you transfer the second account to the child enrolled in college.
The same can be accomplished with children enrolled in primary or secondary education. Suppose you want to help pay for your niece's 6th-grade education while she is enrolled in a private institution. You can now with the changes made in December 2017.
If the niece graduates from her private institution and funds still remain, you can transfer that your nephew who is interested in college.
Anyone can set up a 529 plan; however, some restrictions may apply so it is recommended to review the plan's offering circular to become aware of the state's potential restrictions.
Prepaid Tuition Plans
Most states offer prepaid plans for college tuition. This allows anyone to lock in today's tuition rates to avoid paying higher rates in the future when the person is ready to attend college. There are some restrictions on this plan as some states may restrict prepaid tuition from funding room and board. Also, most state governments sponsor the plan which may limit future options from transferring funds to another state should the future college student change his or her mind.
Education Savings Plans
This type of plan is the most common. It allows anyone to save money in a tax-advantaged account to be used by the beneficiary at a future date to pay for tuition. Some limitations may be mandated so be sure to review your state's plan circular.
Best & Worst States with 529 Plans
Below are two charts that reflect the best and worst states with 529 Plans.
The sooner one starts to save, the less one has to shell out later down the road. Depending on your child's age, this will determine if you need to save more money now with gradual increases annually, or to invest in a consistent amount year after year.
Prepaid tuition plans are not for every family member as most students are unsure where he or she plans to attend; however, it is never to early to start saving money for college and with tax advantages that is blessed by the U.S. Government, why not open an account to start saving for college.