March 19 2010|11.36 AM UTC

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Planning For Higher Education?

Category: Personal FinanceTags: , , ,


Higher education can be extremely costly when you take into account not only tuition, but also living expenses: room and board, food and entertainment, school supplies and textbooks, and the list goes on. It is in your best interest to get an early start on financing your child’s college costs by taking advantage of the widely available college savings plan to prepare for these expenses – the section 529 plan. Without a savings plan in place, many families end up relying upon credit cards to fund education beyond what is covered by student loans.

Here, BillShrink will show you how to make the most of your money to prepare for your child’s college tuition. To do so, let’s look at the types of section 529 plans available to you.

529: State Section Pre-Paid Tuition and College Savings Plans, and the Independent Plan

First of all, let’s make clear what a 529 account is. This type of account is a college savings plan that is protected by the Internal Revenue Code 529, which states plan requirements to be free from federal taxation. There are essentially three types of section 529 plans: the state pre-paid tuition plan, the state college savings plan and the independent college savings plan. Though all are named after section 529 of the Internal Revenue Code, this name-sake is nearly all the plans share in common. It is important to know the differences between the plans, so you know which would better suit your needs.

A state section pre-paid tuition 529 plan is used to save for in-state college tuitions. These plans allow the holder to save toward a specific tuition amount which is guaranteed by the state. Usually, current tuition rates plus the rates of increase are accounted for, and a specific dollar amount is derived. Most prefer these plans as most are backed by a state guarantee and have tax deductions available in certain states. On the other hand, a state 529 college savings plan does not guarantee coverage of a specific tuition amount. This investment uses financial assets that are subject to market conditions, such as stocks and bonds. Although there is risk involved, some prefer these plans because a greater rate of return is possible.

Pre-paid tuition plans are offered by your state of residence, as well as by private institutions. Every state (including the District of Columbia) offers a state section 529 plan. According to FinAid, a non-profit financial aid education service, 32 states offer just college savings plans, two offer just pre-paid tuition plans and 17 states offer both. Each state is a bit different; Some states limit the guarantee on pre-paid tuition plans, by backing for example only a certain percentage of the total investment. Additionally, states employ their own rules as to what college expenses are covered by the plan, and how often or how much a plan holder can contribute.

For example, the state of Alabama allows pre-paid tuition plan holders to contribute only until the child reaches the ninth grade. This plan only covers four years of tuition at an Alabama state college, or, if the child chooses to go to college out-of-state, the plan will only cover up to an amount comparable to four-year’s tuition in an Alabama state university.

On the converse, state section 529 college savings plans do not have general rules that dictate how to invest or how much of an investment is guaranteed. For example, the Golden State College Share Trust (offered in California) is managed by Fidelity Investments. Investments in this plan can range from conservative to agressive, including a 100 percent equity option or two age-based asset allocation options. Generally, college savings plans are managed on a very aggressive portfolio of assets in the child’s younger years, switching to a more conservative portfolio as the child nears college-ready age. Some states do offer a guarantee for college savings plans, but this is a rarity and guarantees are very limited compared to pre-paid tuition plans.

In planning for tuition at a private institution, the independent 529 plan is another type of pre-paid tuition plan. This plan is offered by the Tuition Plan Consortium, a collective group of private colleges and universities. The plan is backed by a consortium guarantee of a percentage of tuition at any member university or college. An investor in such a plan would be issued a certificate, the total investment of which would be equal to a discounted tuition cost.

Why Is Now a Good Time to Open a 529 Plan?

Americans are starting a trend towards reducing debt and starting to save. According to a BillShrink study conducted in February 2009, 46 percent of all BillShrink users reported to have paid off their credit card balance in full each month. In just a year, that number increased to 59 percent. This may indicate that we’re getting better at living within our means now, to prepare for our futures. For parents, this means now is the time to curtail the cycle of debt and create a savings plan for your child’s future. A section 529 plan is the ideal tool to accomplish not only your own financial freedom, but your child’s as well.

Also, why not teach your children now about the value of a high interest savings account and a low interest credit card?

Use BillShrink to show them how to balance between safe spending and smart saving.

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