It's a gift-giving time of year. While cash is always a gift that fits everyone and comes in the right color, there are some ways of giving money that are better than others. One way you can give a gift of money that benefits you and helps someone you love with the cost of college is through a college savings plan. Known as 529 plans, these financial tools may be on the rise as investing opportunities are finally starting to recover.
According to the College Savings Plans Network (CSPN) a 529 plan is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses of a designated beneficiary. They are usually started for a child or grandchild. For middle-class families, they could prove to be a lifesaver down the road. Inside Higher Ed just reported on a new study which found that college students from middle-income families are more likely to end up with student loan debt than their peers from both lower and higher socioeconomic backgrounds.
These families are caught in a crunch when they find out that they make too much money to qualify for student aid packages, but don't have the financial means to cover the costs of college. Starting a 529 plan now could help relieve many of these headaches down the road, and reduce the need to take out high levels of student loan debt.
There are two types of 529 plans: prepaid tuition plans and savings plans. These plans are administered by state agencies and organizations. Many states mirror the federal tax advantages for 529 plans by offering state tax-deferred growth and tax-free withdrawals for qualified higher education expenses. CSPN lists out some of the many advantages of 529 plans:
• They can be used at virtually any accredited university or college in the U.S.
• The account owner of a 529 plan maintains control over the use of the account.
• Some states offer matching grants and other benefits to participants in their 529 plan.
• Qualified expenses include tuition, room and board, fees, books, supplies and equipment required for enrollment.
• There are no income limitations on a person's ability to contribute to an account. Minimum contributions can be as little as $10. In most states, you can contribute as much as $300,000 or more per beneficiary.
College Financial Aid Planning Takes Many Forms
More than 11 million 529 accounts are open nationally already. They lost a little of their luster as a savings vehicle when the economy hit a downturn, but now that the stock market is picking up again, it might be time to reconsider this option. In fact, a recent article in NBC News Business asked whether investors should "super-fund" a 529. This is a strategy where large sums of money are added to an account in a short time frame. For example, some investors might put money into a 529 college savings plan now and then do the same thing again in January. Because of the combination of gift tax exclusion rules and generous contribution limits on these plans, it could be possible to set aside $14,000 now and another $70,000 in January. It is always best to check with a financial advisor and tax advisor before investing such a large sum of money.
A 529 plan is just one piece of the puzzle when it comes to paying for college these days. Parents and grandparents might need to work together to develop a strategy now so that their student will be able to receive the gift of a college education in the future.
Follow Jodi Okun on Twitter: www.twitter.com/jodiokun