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The average cost of college for the 2016-2017 school year was $33,480 for private colleges, $24,930 for public out-of-state colleges, and $9,650 for public in-state colleges – not including room and board. The price of a college education increases every year, and the average student debt in 2015 was $30,100. To avoid the stress of monthly debt payments, many families and individuals set up a tax-advantaged college fund known as a 529 plan.

What is a 529 College Savings Plan?

A 529 college saving plan offers individuals, parents, and family members a way to save money for college tuition. Interested individuals can begin a college savings plan through a competitive state or educational institution’s program. These 529 plans are not subject to federal taxes, and some state plans do not subject the plan’s earnings to taxes either.

Anyone can set up a 529 plan for a beneficiary. Often, parents, grandparents, and other close family members set up these plans on behalf of a child. A beneficiary can use the money in the fund for education-related costs including tuition, books, fees, room and board, and technology requirements.

Also known as qualified tuition plans, account holders can set up one of two types of 529 plans. A prepaid tuition plan gives account holders the ability to prepay for tuition at participating educational institutions. These types of plans include more predetermined rules and restrictions, but also offer a level of security that other plans may not.

A college saving plan, on the other hand, works more like a savings account. Account holders can contribute up to the limits of the plan, which may exceed $200,000. While these plans offer more flexibility, the plan may not offer any investment guarantee. The savings account may not earn interest and the valuation of the account could drop over time.

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Are College Savings Plans Tax Deductible?

The federal government and the state will typically not tax distributions from qualified 529 plans. An account holder may not, however, deduct contributions from his or her federal taxes. At the state level, an account holder may claim certain income tax deductions or credits associated with the savings plan.

An account holder may choose to change the beneficiary named in the savings plan at some point. If rolled over to a different savings account, the distributions will remain tax-free (i.e., the federal government does not penalize account holders for beneficiary changes).

What Is the Best College Savings Plan?

Most account holders compare college saving plans in different states and educational institutions before making an investment. You can apply for a plan in any state, regardless of residency. If using a college savings plan, a beneficiary can choose to attend school in any state. Prepaid plans may restrict a beneficiary to certain participating schools.

As you compare the best 529 plans, look at the number of fund options available and the fees associated with the plan. In-state plans may offer certain tax breaks while direct sale plans (plans that don’t require an advisor to manage) will involve fewer outside fees.

To make the most out of any college savings plan, tell friends and loved ones about the plan. Encourage family members to contribute to the plan in lieu of gift giving, and consider applying “keep the change” savings and rewards toward the college fund.

How Do I Open a College Savings Plan?

To open a 529 college savings plan, you can work with an advisor or apply directly to certain funds. Vanguard Group operates a few low-cost plans in states including Nevada and Utah. To begin the process, look for a financial advisor who offers 529 planning support or apply for a savings program directly on a state’s college savings plan website. US News & World Report regularly updates a 529 plan finder to help interested individuals learn more about state plans.

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