Understanding 529 College Savings Plans

College tuition costs continue to rise. In fact, according to CollegeBoard, college tuition has risen nearly 54% in the last decade when accounting for inflation dollars. That’s staggeringly high. The same website estimates the average cost of private college in the United States at $32,000 per year. State colleges fair a little better at an average cost of $9,410. per year. Considering four years of tuition costs, the price for a college education is a very expensive one. With no signs of costs lowering any time soon, it’s important to start preparing as soon as possible for your children’s future education.

Today, we’re taking an in-depth look into 529 college savings plans to see if owning one may be intelligent for you.

What is a 529 college savings plan?

Let’s start at the beginning, what exactly is a 529 college savings plan? A 529 plan is a savings plan created as a tool to help families cover the high price of future college costs. The plan is a tax-advantaged savings plan authorized by the Internal Revenue Service and the U.S. Government. These specific savings plans are sponsored by states, state agencies, and/or educational institutions, like colleges and universities. There are two types of 529 plans: 1. Prepaid tuition plans or 2. General college savings plans. The difference between the two is important to note. All 50 states sponsor at least one type of 529 plan.

Prepaid Tuition Plans

Prepaid tuition plans essentially ‘lock-in’ the current price of college tuition in the market. For example, taking the average costs of state university from above of $9,410 per year, this price would be ‘locked in’ and not subject to the high inflation rates by the time your child reaches college age. This can potentially save thousands of dollars. However, these plans are only eligible for participating public and private universities and many times require the beneficiary to live in the same state as the institution. Often these plans are limited to covering tuition and books, other related expenses may not be eligible.

College Savings Plans

College savings plans are a more general and flexible plan. It works much more like a traditional savings plan. Essentially, it covers all college-related expenses, including tuition, books, room and board, fees, living costs, etc. The plan can be used at any university in the U.S., making it a more flexible option for kids who may end up going to college out of state or attending a different university than anticipated. This plan is not guaranteed by the state, and is instead regulated by the general market ups and downs.

Check out the chart below from the SEC to see a side-by-side comparison of the the two plans. Figuring out which plan 529 plan works for you.

Prepaid Tuition PlanCollege Savings Plan

Locks in tuition prices at eligible public and private colleges and universities.No lock on college costs.

All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.Covers all “qualified higher education expenses,” including:

  • Tuition
  • Room & board
  • Mandatory fees
  • Books, computers (if required)

Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.Many plans have contribution limits in excess of $200,000.

Many state plans guaranteed or backed by state.No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.

Most plans have age/grade limit for beneficiary.No age limits. Open to adults and children.

Most state plans require either owner or beneficiary of plan to be a state resident.No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.

Most plans have limited enrollment period.Enrollment open all year.

Other considerations before starting a 529 savings plan

A 529 savings plan is an important step in mapping out your overall financial goals. Deciding between which 529 plan – prepaid vs general college savings – is among the myriad of considerations necessary. Each of the plans offer specific tax advantages and may incur administrative fees. The plans may also impact your student’s eligibility for financial aid from the university. There are many things to consider before jumping into one of these plans.

Leftover Money

When opening a 529 college savings plan you’re making a decision based on a lot of variables. Perhaps your student might choose to go to a college overseas or he or she might receive a partial scholarship to an unexpected college choice. When making these considerations it’s important to remember that any leftover or unused money in the 529 plan can be used in alternate ways. Common uses for leftover 529 money are:

  • Rolling the money into another beneficiary’s account. This can be a great way to help a younger child bulk up their future college savings. 
  • Using the money for graduate and master’s degree programs. The money in the 529 college plans can also be used for furthering your child’s college career as well. Alternately, some parents use leftover money to pay for their own master’s or graduate programs.
  • Scholarship Withdrawals. If your child does end up getting a scholarship to help pay for the costs of schooling, you can withdraw the equivalent amount from the 529 account without paying a penalty. However, keep in mind that you will have to pay income tax on any gains.

There are many things to consider before jumping into one of these plans. Let our expert financial advisors help you figure out what plan is best for your financial situation.