What is a 529 Savings Plan?

One option to save for college is a 529 savings plan

Flickr user 401(k)2012

With tuition costs at an all-time high, students have sought ways to ease the college experience into their budgets, balancing their wallets and their future plans—though college is oftentimes more in your price range and affordable than you might think, it’s still important to have a financial plan in place. The majority of students have to adjust their finances in order to attend college, whether that means applying for scholarships, looking for federal financial aid through the FAFSA and CSS program, or investing in student loans. One road for these students to explore, which is sometimes overlooked, is a 529 plan, a program designed to ease the effect of hefty tuition bills by stretching out payment over a period of time.

What’s a 529 savings plan?

529 plans are so named for a section of IRS code that allows for their existence, specifically laying out the precedent that “… A qualified tuition program shall be exempt from taxation under this subtitle.” In black and white, the financial law provides a clear path ahead for those struggling under the weight of college costs. 529 plans are, in many ways, a way for students to stave off debt while still paying their full tuition. However, before diving headfirst into the provisions of the code, it is important to understand its full implications.

Key points you should know about the plan.

The legalese used in the IRS code is complex, and there are a few key points students should be aware of when deciding whether or not to go this route. “529 plans” are an umbrella term for any federal, state-level, or private plan designed to ease tuition costs and taxes on families and students. 529 plans fall into two columns; prepaid plans, where students purchase so-called “tuition credits” at market cost to use in the future, and savings plans, which can only be offered by states.

The 529 savings plan is much more popular, due to the volatility of both the economy and the cost of tuition. If one opts for the prepaid plan, they are essentially gambling that the costs of tuition will only increase over the next few years, freezing themselves to the price of tuition at the time they bought it. Needless to say, such a gamble could end up backfiring. Savings plans have many benefits compared to prepaid plans and are often recommended to students looking for financial assistance. In a basic sense, savings plans allow families to save for college in the future, depositing funds into accounts when they have the money, as opposed to borrowing money from the government once the time for college rolls around.

In a 529 savings plan, students are able to use their funds at private institutions, opposed to pre-paid plans, which have strict rules requiring them to be used at in-state schools. Before signing up for a savings plan, students should check to ensure they are able attend their school of choice under the plan. Some private schools do not allow their students to have any sort of federal assistance, but most are the opposite.

Do your research about the plan before investing.

Once students decide to invest in a plan, they should research their state’s allowances for tax breaks under the local plans. Some states, like New York, have vastly inclusive programs that allow students to attend trade schools and community colleges, while others are narrower in their focus. Students should decide for themselves what plan serves them best, and workers at each state’s education department are well-trained and adept at helping students make these decisions. Going off to college is tough enough without added pressure and complexity. Through 529 savings plans, families take tuition costs into their own hands, ensuring the best possible financial and academic situation for the future.

College Raptor can help with your college finance planning! Using our free match tool, you can discover your personalized college costs, see what sort of financial aid packages you might be offered from colleges around the country, and more!

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