Start Saving For College Now: How 529 Plans Can Help
By Gerri Detweiler
The Union Credit Doctor
Many parents feel like one minute their child is in diapers, and the next minute driving a car. While your child is growing, so is the cost of a college education, which has risen an average of 6% each year.
A higher education is more important than ever in today’s economy. That also means that saving for college is crucial. Without savings, students may be forced to take on large amounts of student loan debt, or even forgo a degree to start working.
529 plans offer one of the most popular ways to save for college. (“529” refers to the section of IRS code that established these plans.) Anyone can set up a 529 plan and name any legal U.S. resident as the beneficiary, including children, grandchildren - or even themselves. These plans offer a great deal of flexibility, as well as favorable tax treatment.
As a union member, if you open a new 529 plan for your child or grandchild and contribute at least $1,000, you may be eligible for a $500 Union Plus College Savings. Grant.
Choosing a 529 Plan
You’ll have many choices when it comes to a 529 plan. Each state offers at least one plan, and you are not limited to your state’s plan. There are two basic types of programs:
529 prepaid tuition plans allow you to purchase some or all of the cost of college tuition in advance. You are essentially buying tomorrow’s tuition at today’s prices. You can make monthly payments over several years, or contribute a lump sum amount, depending on how much of the cost you wish to prepay. Programs that cover room and board may be available as well.
Most state-sponsored prepaid tuition plans allow you to attend any participating public school in that state. For state-sponsored plans, you may be restricted to purchasing a prepaid tuition plan for the state in which you live. The Independent 529 plan allows you to pre-pay tuition at any one of more than 274 member colleges or universities, including private schools.
If the student decides to go to a non-participating school, you don’t have to forfeit the money you’ve saved. You can likely use the money you’ve contributed at another school (though you may not get as good a deal) You may be able to roll the money over to a 529 savings plan; or name a different beneficiary.
529 savings plans allow you to set aside money for college in a tax-favored investment account. You don’t get a federal tax deduction when you contribute to one of these plans, but you will pay no federal taxes on the earnings or growth, provided you use the proceeds for qualified educational expenses, including tuition, books, supplies, and even room and board (for students attending at least half-time) at any accredited college or university in the U.S., as well as some foreign institutions.
Your savings is typically invested in mutual funds that purchase investments such as stocks and bonds. You choose an investment plan, and the plan manager makes the investment decisions. You have the opportunity to change plans, and beneficiaries, periodically.
While you do not have to choose your state’s plan, there may be advantages to doing so, including a break on state taxes, matching contributions, or protection of the plan’s assets from creditors.
Do Your Homework
Fees and performance for these plans vary widely, so it’s crucial you do your homework when choosing a plan. Fortunately, there are a number of websites that can help:
- SavingForCollege.com ranks top performing 529 plans, and publishes an annual fee study.
- The Financial Industry Regulatory Authority (FINRA) offers a 529 Expense Analyzer.
- Morningstar reviews individual 529 plans.
Do It Yourself?
Another choice you’ll have to make is whether to enroll in a 529 plan directly (“Direct Sold” plans), or through a broker (“Advisor Sold” plans). Enrolling directly can save you the money you would pay toward broker commissions, while working with an advisor can be valuable if you have financial or estate planning concerns. (If you are enrolling in an out-of-state plan, you may have no choice but to enroll through a broker.) Another alternative: hire a fee-only financial planner who can help you sort through options for an hourly or flat fee. You can find financial advisors who specialize in college funding at SavingForCollege.com.
Union Plus College Savings Grants Give 529 Plans A Boost
Here’s another reason to get started now. Union Plus offers grants of $500 to union members or retirees who open a new 529 college savings or pre-paid tuition account after July 1, 2009, and contribute at least $1,000. If you have multiple children or grandchildren, you can open multiple accounts, as long as your contributions total $1000.
These grants do not have to be repaid. Visit Union Plus.org/CollegeSavings for more information.