Preparing for your child’s college education can be a daunting — and expensive — task, but with a 529 Plan you can begin saving today.

529 Plans: The Basics

529 Plans got their name after being highlighted in section 529 of the International Revenue Code.

A 529 Plan is basically an investment in the future education of your child operated either by a state or an educational institution. Every state currently offers at least one 529 Plan, and they can differ depending on the location of the school or your residence.

The Plans

There are two types of 529 Plans: Pre-paid Tuition and College Savings plans. Under these plans you can choose investments that fit your needs. The institution you are interested in must be eligible under the 529 Plan.

The Pre-paid Tuition Plan

This is a plan that locks future tuition rates for in-state colleges at their current value. The advantage of this plan is contingent upon the rate of tuition inflation. Pre-paid plans are usually backed by the state but can also be backed by the higher education institution.

The College Savings Plan

Much like a 401K, this plan is dependent upon the market performance of your chosen investments. The plan will allow you to choose from several different investment options. Unlike the pre-paid tuition plan there are no residency requirements.

Advantages

Most states will provide state income tax deductions for all or part of the contributions. Another large tax benefit of 529 Plan is that the principle will grow, tax-deferred.

529 Plans also have low minimum start up costs. Other fees typically tied with investment opportunities are also relatively low in relation to the state administering the plan. Once you begin one of these plans, only you are in control of the account even though it is designated for a beneficiary.

Drawbacks

Everything has its positives and negatives, including this plan. For one, not all educational institutions can be attended using a 529 Plan.

If you decide to withdraw money from the plan and decide not to use it for education purposes, there will be a 10% federal tax penalty. The 529 Plan also may affect the beneficiaries’ eligibility for student loans and other financial aid.

Summary

Aside from the few drawbacks, the 529 Plan is a sound investment and a great way to help your child start off on the right foot. For more information on the 529 Plan, click here.

President Barack Obama announced in late March the expansion of federal income-based repayment programs — originally designed for workers in public service fields — to cover people working in the private sector. Federal income-based repayment programs cater to borrowers with low incomes compared to their relatively high amount of student debt.

Be Sure To Read The Fine Print

The major exception to the federal repayment plan guidelines is that private student loans do not qualify.  Only loans backed by the federal government, which usually feature fixed or lower interest rates, can be repaid using the government’s plan. The plan mandates that the maximum percentage of income that can go towards re-paying loans is 15% per month. If contributing 15% of your income each year doesn’t repay the loan in 25 years, all remaining debt will be forgiven.

For those who work in the public sector, all remaining debt will be forgiven after 10 years of annual contributions. Starting in 2014, the program gets even sweeter for borrowers: All federal loans will be capped at a maximum of 10% of the borrower’s discretionary income, and the repayment maximum will be lowered to 20 years for non-government employees. Government employees’ repayment plans will not change in 2014.

Details Of The Repayment Plan

If the total amount of your loans is equal to or greater than your annual salary, it’s likely that you are eligible for the income-based repayment program. The amount you pay each month is based on your discretionary income.  If your income is under 150% of the poverty line for your family size, then you pay nothing each month.  If a single person makes $60,000 per year and owes $60,000 on their loans, then he or she would pay more than would someone supporting a family of four on the same income.

Allowances also exist for those borrowers whose income has changed dramatically since their most recent tax return. Currently, there is a marriage penalty that does not account for two student loan payments within the same household, but that should be repaired beginning in July.

How To Take The First Step Away From Debt

To apply for the repayment program, contact your lender.  Many consolidated loans are eligible, but borrowers who have defaulted on a loan must rehabilitate it before they can qualify for the repayment plan.  It’s a good idea to keep diligent records of your employment so that in 10 or 20 years you will be able to produce the evidence you need to have your remaining debt forgiven.

Taxpayers Responsible For Greater Share Of Borrowers’ Debt

Few borrowers currently use federal income-based repayment programs compared to other payment options such as deferment or forbearance, which suspend payments on federal loans while interest and fees continue to grow. The new legislation could prove to be highly beneficial for those incurring substantial debt by attending Ivy League schools or pursuing degrees in law or medicine.

One concern taxpayers might have about the federally subsidized loan repayment is that borrowers would be able to skip out on a large amount of student loan debt while tax dollars pay for the forgiven debt. Because the new plan would mean borrowers pay less per month and their debt is forgiven earlier, the government would absorb much more of financial blow than before.

Student loans are, in most cases, a “good debt”: A college degree, especially in a top field, will typically lead to greater long-term earnings. But student loans, as with any loans, should be taken out with caution and paid off on time. If you’re thinking of investing in your future with a little help from student loans, do your homework before signing any paperwork.

“It is difficult to accurately predict future earnings,” College Board researchers Sandy Baum and Patricia Steele said in a release. “Many young people have a limited understanding of the impact of the obligations they are undertaking. Too many students are borrowing more than they will be able to manage.”

Be Cautious: Bankruptcy Can’t Save You From Student Loans

Student loans typically cannot be erased in bankruptcy court, so once you have borrowed, the chance of finding an escape hatch is slim. For that reason, you need to evaluate realistically how much debt you will be able to pay back after you graduate.

As a general rule, your total student loan burden should not be more than the salary you expect to make in your first year after college. If you graduate with a four-year liberal arts degree and expect a $25,000 salary, don’t use more than about $6,000 per year in loans. If you go through medical school but expect a $100,000 salary after graduation, you should be able to take out about $12,500 per year. Be sure to adjust these figures depending on the interest rate of your loan, as private loans can often come with higher interest rates. According to CNN, the average student currently graduates with about $21,000 of debt.

The reason you should be extra-careful with student loans is the fact that they are not eligible to be wiped away by a bankruptcy filing, according to the U.S. Department of Education. If you are not able to prove your student loan is worthy of an economic hardship deferment (addressed below), there is almost no way to cancel your loan via bankruptcy.

Partially finished with college and your loans are already looming? Did you change majors or is school taking longer than you had budgeted for? Try finding year-to-year grants and scholarships you might qualify for. You can find lists of federal grants at http://studentaid.ed.gov.

How To Get Out From Under A Bad Student Loan

Although it is tough to escape the stringent student loan regulations, several programs exist that can provide some relief.

Check out FinAid.org’s Financial Hardship Deferment Calculator to see if you qualify for an economic hardship deferment or forbearance. If you qualify, your monthly payments could be reduced or even suspended.

If you are making money, but not enough to pay off your loan on time, you can apply for an extended repayment plan. But keep in mind, private student loans typically do not offer extended repayment, and stretching out your repayment will cost you more in the end because of interest payments.

If you are a full-time teacher or a member of the armed services, portions of your debts could be forgiven. If your school closed before you graduated, your loan could be discharged.

Whatever you do, do not merely forget about your loan or default on your loan. If you fail to make payments on a federal student loan for 270 days, the government can garnish wages up to 15 percent and withhold money from your Social Security. You will probably have to pay collection charges up to 25 percent, and you could be sued for the immediate payment of the loan amount.

Remember how overwhelmed you were the first time you went to class and sat in a big lecture hall with 200 students, some of which were upperclassmen who had 2 or more years of experience than you?  Now multiply the class size by a million, and the years of experience by 10 or 20, and that will give you some idea about the competition you face coming out of college.

But don’t worry, because by being prepared and knowing the challenge ahead, you can make sure that you aren’t caught by surprise once graduation day comes. To help you put your best foot forward after graduation, MyBankTracker.com has complied a list of some simple steps you can take to impress employers and get your name out there.

The 2008 Huntington Backpack Index indicates that parents need to be prepared to spend $385 for elementary school children, $551.81 for middle school children and $911 for high school students. Huntington also found that many schools are requiring more electronic devices such as flash drives as well as more elaborate organization tools such as notebooks and planners.

Bank of America introduced a financial awareness campaign designed to educate and empower students to take control of their finances and bank with confidence in this new academic year.

Morris on Campus,™ Life According to an Upperclassman,™ provides college students with tips on how to navigate campus life, including money matters, through Webisodes, additional online content as well as offline communication pieces. Morris will introduce students to Bank of America’s new Student Package, a suite of easy-to-use banking products designed specifically for students, while also pointing them to helpful financial resources, such as the Student Financial Handbook, a downloadable guide that provides students with easy to understand explanations and advice on an array of financial topics. The Morris on Campus site can be found here.

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