529 plans are a great way to prevent skyrocketing college tuition costs from devouring parents’ college savings. The plans are designed to keep college savings investments growing with increases in tuition costs.
Tuition sticker shock has reached an all time high. According to the U.S. Department of Education, college tuition increases have grown much faster than the rate of inflation, growing to ten times their levels in 1980.
Parents who want their college savings to pack more of a punch by the time their children graduate from high school can choose from among three types of 529 plans that will help keep their investments growing.
The first type of 529 plan is called the 529 Savings plan. It allows parents or other benefactors to put college savings money into an account where it can grow by being invested in a variety of ways. The money in these plans can be used at any school a student chooses, but investment volatility means the plans carry some risk.
529 Prepaid Tuition plans let parents pay for tuition at today’s prices, generally without any investment risk. Prepaid plans are offered by individual states and often require in-state residency and can only be used to pay for state schools.
Private College 529 plans allow parents to prepay for tuition at almost 280 private schools around the country. Money in the plans can be used at any member school. As with state 529 prepaid plans, the money isn’t invested, so there’s very little risk that the investment will lose value.
529 Savings Plans: Invest to Grow
529 Savings plans allow a parent or other benefactor to place money into an account to pay for a student’s college tuition and other allowable education expenses. The money in the account can be invested in a variety of ways, from stock mutual funds to bond funds and money market funds. There are also aged-based portfolios that start out investing the money aggressively and then switch to more conservative investments as the student nears college age.
Contributions to 529 Savings plans aren’t tax deductible, but any earnings from investments aren’t taxed.
Students can generally use withdrawals from 529 Savings plans at any university or college they like. The money can be used for tuition, room and board, mandatory fees and sometimes books and computers. Many of these plans have contribution limits greater than $200,000 and there’s no limit to the age of the student. Parents or guardians can enroll in these plans at any time of year.
The Lowdown on 529 Savings Plans
Since 529 Savings plans are very flexible, allowing students to choose any school in the country and with very few other restrictions, they’ve traditionally been very popular with parents. However, since the money in the plans can be invested, the plans carry a significant risk. Namely, investments can and do sometimes lose money. It’s possible for a parent who puts $30,000 in a plan to have only $15,000 left after a big market crash. For this reason, the plans have seen significant decreases in enrollment in recent years, with only 3% of parents saving in the plans.
529 Prepaid Tuition Plans: Lock in to Grow
The next type of 529 college plan is the 529 Prepaid Tuition plan. These plans work by locking in tuition at current rates. They effectively allow parents to buy tuition credits at today’s prices. They’re a lot less flexible than 529 Savings plans, but most of them also carry a lot less risk.
Screen grab of Florida’s 529 Prepaid Tuition plan’s online portal.
529 Prepaid Tuition plans are generally run by state governments, so the rules and regulations of the plans vary depending on which state the plan is purchased in. Most 529 Prepaid plans only work at state schools and require in-state residency, with the exception of Massachusetts and Alabama, which allow anyone to invest in their plans. While the tuition cost can only be locked in at in-state schools in most cases, money from the plans can be withdrawn, often with interest, and used to cover tuition at regular rates in other states.
Unlike 529 Savings plans, funds from 529 Prepaid Tuition plans can be used only for tuition and mandatory fees. The money from the plans can’t be used for room and board or other costs. Most of the plans set student age limits and limited enrollment times that vary state to state.
The Massachusetts 529 Prepaid Tuition plan’s online portal.
The Lowdown on 529 Prepaid Tuition Plans
Thanks to a volatile stock market, enrollment in 529 Prepaid Tuition plans is up in recent years. Florida’s plan saw record enrollment in 2014. Virginia’s plan had a total of $53 billion invested in 2014. Prepaid Tuition plans are attractive to college savers because the money in most of them is guaranteed by state governments and can’t lose value like the money in 529 Savings plans can. While Prepaid plans do limit a student’s options somewhat, they offer a way to lock in tuition costs at current rates and the money can be reclaimed if the student decides to attend school at a private school or somewhere out of state.
Pennsylvania’s 529 plan invests the money in the plans, which opens it up to some amount of risk.
529 Prepaid Tuition plans do have some pitfalls. While most states guarantee the funds in the plans, some don’t. Some states, like Michigan, Nevada and Pennsylvania, invest the funds in their plans, which means it’s possible for the plans to lose money. Parents thinking about investing in a 529 Prepaid Tuition plan should look into the details of the plan in their state carefully before investing.
For more info on Private College 529 plans, visit the web portal link at the bottom of this article.
Private College 529 Plans
There’s now an option for parents interested in 529 plans but who’d rather have the option to save for private school tuition. The Private College 529 plan is a prepaid plan that lets parents pay for tuition at today’s rates at almost 280 participating private colleges. The list includes Harvey Mudd College, Johns Hopkins University, Brandeis, MIT, Princeton and hundreds of other schools. Money in the plans are not invested and is generally guaranteed.
Accounts can be opened at any time and the money in them can be used at any school on the list. If a student decides to attend a school that’s not on the list, the money can be rolled over into a traditional 529 Savings plan or Prepaid Tuition plan. Even if a college drops out of the program, plans started while the school was still a member will still be honored at that school. The plans have other flexibilities, including allowing withdrawal of funds in the event the student gets a scholarship and allowing parents to contribute as much or as little as they like. To date the money in the plans can only be used for tuition and mandatory fees.
The Lowdown on Private College 529 Plans
For parents who want to give their children a choice of a wide spectrum of private schools, a Private College 529 plan is a good investment.
For more information on Private College 529 plans, visit https://www.tomorrowstuitiontoday.org
Sources
- https://www.gao.gov/products/GAO-13-64
- https://www.sec.gov/investor/pubs/intro529.htm
- https://www.wsj.com/articles/SB122878644306790217
- https://www.ed.gov/edblogs/ous/2013/07/weighing-the-cost-and-value-of-a-college-decision/