529 College Savings Plans & Prepaid Tuition Programs
If college is in your future, then you probably already know that there’s no time like the present to start saving for it.
Today, four years of in-state college cost about $50,000 – which, incidentally, is what just one year at private school costs. And those costs are going up every year – by as much as 7%. The best place to save for college is in a 529 Savings Plan.
529s are tax-deferred, state-sponsored savings plans earmarked for education expenses. With a 529 Plan, you’ve got plenty of options to choose from, since every state sells at least one and there are more than 80 on the market today.
Save now and take out fewer federal student loans later.
How does a 529 Plan work?
There are two different kinds of 529 Plans: College Savings Plans and Prepaid Tuition Plans. College savings plans are managed investment portfolios akin to a mutual fund. A prepaid plan locks in the cost of your college tuition at today’s rates, protecting you from price hikes.
Which type of 529 Savings Plan is better?
The answer to that question really depends on you: How much money do you have to invest? How long do you have to save? How certain are you where you’ll go to school? A good investment counselor will ask you and your parents all of these questions to help you make the best choice.
Each type of plan has its advantages and disadvantages. With a prepaid tuition plan, you know exactly how much you’ll have when it comes time for school. A college savings plan doesn’t guarantee the rate of return. However, with an early investment strategy and a well-earning plan, you could easily net far more from a college savings plan than with a prepaid tuition plan.
But what if I decide to go to school out-of-state?
This is a common question about 529 Plans. In all likelihood, you will enjoy the full benefit of your savings whether your school is in the same state as your 529 Plan or not.
Most college savings plans allow you to put the full value toward any college in the United States. Some plans even allow you to use the money to pay for study abroad.
With a prepaid tuition plan, there are two possible limitations you’ll want to keep in mind: First, the cost of tuition in-state will likely be far less than out-of-state, which means that your savings may not stretch; and second, some prepaid plans don’t allow you to transfer the full value of your savings if you attend an out-of-state school (or a private, in-state school). Bottom line: Read the fine print carefully.
With college costs rising steadily many will still have to apply for college scholarships, grants, and loans despite money saved through these programs.
Research your options carefully, but whatever you do, make sure to start saving today in order to secure your educational future.