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529 Plans

529 plans are college savings plans created by state governments. These plans differ from state to state and from year to year. The purpose of 529 plans is to help parents and others to prepare for the future costs of education or to prepay tuition costs for a specific in-state university. There are two major types of 529 plans: 529 prepaid tuition plans and 529 savings plans.

529 prepaid tuition plan: With a 529 prepaid tuition plan, parents pay a specific amount of money in exchange for a promise that tuition is guaranteed to be paid when the child enters college. The advantage of having a 529 prepaid tuition plan is that you know tuition will be covered, regardless of increases in tuition cost. This plan may be useful if you think your child will not be eligible for financial aid by the time your child is ready to enter college.

The disadvantage of this plan is that it may not be offered in the state where your child wants to attend school. Additionally, it does not allow you to choose your investments. Given your different investment options when your children are young, you could be more aggressive with your money and gain higher returns. Also, remember that having assets in this plan reduces your child’s eligibility to receiving financial aid dollar-for-dollar.

529 savings plan: Most investment advisors would agree that this is the best way to save for your children’s education. With a 529 savings plan, the control of the funds resides with the parent, who chooses the investments from among a set of approved investment alternatives that are set up in each state. Earnings are tax free if principal and earnings are used for approved higher-education expenses, which expenses are generally considered quite broad in scope. Some states may even offer tax deductions on contributions made to your local 529 funds; check the guidelines in your state. Assets in these plans are not considered the student’s funds; this distinction increases a student’s eligibility for financial aid.

A disadvantage of the 529 savings plan is that it may not cover all college expenses. Also, since you choose the investments, there is a risk of loss involved.


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