The average cost of a college education in the United States is $35,331 per student per year, and that cost is rising.
Some students will spend up to $400,000 to earn their bachelor’s degree.
For college-bound students and their parents, trying to figure out how to afford college can be stressful.
While there are many ways to pay for college, such as financial aid, grants, loans, and work-study programs, it’s best to save well in advance.
With a 529 plan, parents, grandparents, and other family members can invest in a child’s education, even before they are born.
While there will only be one account owner and a listed beneficiary, all relatives can contribute to the account. Families enjoy this opportunity, as it gives them peace of mind that they’re preparing well in advance for their child’s future.
A 529 plan is one of the best ways for you to invest in your child’s education and quality of life.
What is a 529 plan?
A 529 plan is a tax-advantaged investment account that allows parents and other family members to save for a child’s future education expenses. Young adults can also open a 529 college savings plan and save for their future as well.
Typically, the money that goes into the savings account will grow free of federal income taxes or state income tax, as long as the money is spent on educational expenses for the designated beneficiary.
If the money is used for something other than qualified education expenses, you will likely be charged a fee.
Some 529 plans will even lock in future college tuition costs at today’s rate. This type of college savings plan is beneficial and a wise investment since the cost of tuition will undoubtedly continue to rise in subsequent years.
While 529 accounts were intended for higher education, they can now also be used for K-12 private education.
Investing in a child’s future may be one of the most important things that a parent or family member can do.
Types of 529 plans
There are two types of 529 plans, and choosing which one you’ll invest in is the first step to protecting a child’s educational future.
Prepaid plans
529 prepaid tuition plans allow you and other family members to buy a child’s tuition ahead of time, using current rates. You can save a lot of money by locking in today’s prices.
Not all states offer this type of plan, however. The account owner or the named beneficiary must also be a resident of the state in which it is purchased.
When you open the account, you can make payments in a lump sum, choose a five-year payment plan, or make monthly payments.
This plan may be more limiting than an investment plan. But, it can be an excellent choice for someone living in a state that offers it and doesn’t intend on moving out of state in the future.
Investment plans
With 529 college savings plans, you can invest, tax-free, in a child’s college education.
An investment plan is the most common type of 529 plan and can cover tuition, room and board, textbooks, computer hardware and software, and other qualified costs.
The account may go up or down depending on market performance, as it works like a 401k or IRA retirement plan. You won’t have to pay a financial advisor to manage the plan’s investment if you can manage the account yourself.
An investment plan is more flexible than a prepaid plan, as students aren’t limited to which school or university they go to. Since most parents or family members won’t know which school their child will attend in the future, it can be a safer option.
What Counts as Qualified Educational Expenses in a 529 Plan?
Qualified higher education expenses are ones that are necessary for a student to enroll in and attend a college or university.
The most common qualified expenses covered by a 529 plan include:
- Tuition and fees
- Textbooks and supplies required by enrolled courses
- Room and board for students enrolled at least half-time
- Computers, software, and internet access
- Special needs services and equipment
- Student loans up to $10,000
- Up to $10,000 in K-12 private education tuition expenses
- Apprenticeship costs when a program is registered with the U.S. Department of Labor
Expenses that are not considered qualified expenses:
- Transportation and travel costs
- Health insurance
- College application fee
- College testing fees
- Extracurricular activity fees
- Personal living expenses
The Benefits of a 529 Plan
As the donor of the account you will maintain complete control over it.
Even though the account will have a beneficiary, they will have no legal rights to the funds. This means you can assure the money is being used for its intended purpose.
529 plans allow for tax free withdrawals and are not subject to federal income tax if it is spent on the beneficiary’s education. Not all investment accounts offer tax benefits and are tax-free, which makes them appealing.
Everyone is eligible for a 529 plan, and you can open as many accounts as you would like. If you have multiple children or grandchildren, you can start an account for each of them.
You can stash away money for a child at any time, even before they are born, which will secure them a bright educational future.
Saving early can take away the stress of trying to find ways to pay for college in the future.
Considerations Before Opening a 529 Plan
Before you open a 529 plan you will need to decide which type of plan will benefit your family the most.
Choosing a flexible plan that allows a child to choose from any school they want can be a smart choice.
You may also want to consider how much you want to invest in the child. Do you plan to cover all of their educational expenses or half?
Different states offer different 529 plans, and each will have its own fees, benefits, risks, and penalties. You don’t have to choose a plan in your state if an out-of-state plan is more attractive.
Keep in mind that a child may grow into a young adult that does not plan to go to college.
Perhaps their career of choice does not require college courses. If this happens, you will need to either change the beneficiary on the account or let them withdraw the money for other living expenses.
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