529 Plans Make College Funding Easier Than Ever

College education can be the key to a child’s or grandchild’s future, but the cost of that education can be astronomical. The average annual cost of college is expected to be three to four times current prices — $6,185 for a public college; $23,712 for a private college – when today’s newborn starts college. Feeling overwhelmed?

Luckily, now there are more ways than ever to start saving for college. The Uniform Gifts to Minors Act (UGMA), The Uniform Transfers to Minors Act (UTMA) Accounts, and Coverdell Education Savings Accounts (formerly known as Education IRAs) are just some of the traditional ways to fund college. In recent years, tax-advantaged Section 529 plans have become increasingly popular — helping to make saving for college easier than ever.

Section 529 Plans: State-Sponsored Saving Programs
All 529 plans are run by individual states in association with investment management companies. Depending on the plan, parents and other individuals may be able to contribute more than $250,000 per beneficiary, including earnings, toward the future tuition of a child. All assets, including earnings, under all 529-plan accounts established for the benefit of a particular beneficiary must be aggregated when applying the limit. While new contributions will not be allowed once this limit is reached, earnings, however, will continue to accrue. Maximum contribution limits are adjusted periodically.

Money in the account can be invested in more aggressive investments when the child is younger and moved to cash or more conservative investments as the child nears college age. Remember there are fees, charges and tax ramifications associated with a 529 plan, and the underlying investment options are subject to market risk and will fluctuate in value. Many plans require a $250 minimum to open an account, and accounts can be set up for monthly contributions. Plus anyone can contribute — and the money can be withdrawn to pay for tuition or fees at any accredited post-secondary public or private school in the U.S.

“Over a lifetime, the gap in earnings potential between a high school diploma and a B.A. exceeds $800,000.”

Benefits of 529 Plans
First, the contributor to a 529 plan retains control over it — which means that, unlike with some other college savings vehicles, the child cannot use their college money for other purposes.

Second, although contributions are not federal-income-tax-deductible, assets in a 529 account — including gains or earnings — can be withdrawn federal-income-tax-free for qualified educational expenses such as tuition, fees, room, board and some supplies. Some states offer residents favorable tax benefits for investing in their state plan. Consult your tax advisor about your particular situation. (However, keep in mind there are fees and charges associated with investing in a 529 plan.)

Start Saving Today
According to a 2007 College Board Study, Education Pays, people with a bachelor’s degree earn more than 60% more than those with only a high school diploma. Over a lifetime, the gap in earnings potential between a high school diploma and a B.A. exceeds $800,000. In other words, whatever sacrifices you make for your child’s college education in the short term will be more that repaid in the long term.