With the cost of education increasing every year, it is wise to review all of your available options to pay for the cost of education and tuition. Many parents do not want to see their children in debt after college, so its wise to invest while their child is young to help pay for the cost of college.
The average cost of tuition and fees for the current 2013-2014 school year is as follows: $30,094 for private colleges, $8,893 for state residents attending public colleges, and $22,203 for out-of-state residents at public universities, according to College Board. Multiply that by four years, the estimated time it takes a student to complete an undergraduate degree, and private college students would pay $120,376, in-state public college students would pay $35,572, and out-of-state public college students would pay $88,812 to complete their degree. Keep in mind that is only an estimate for the cost of tuition. Other school-related expenses such as housing, food, books, and the general cost of living are not factored in.
When it comes to their child’s education, many parents typically choose a 529 plan (which is named after the IRS code that created it).
Types of 529 plans
There are two types of 529 plans, the first is a savings plan, the other is a prepaid plan, both offer identical tax benefits. Savings plans work similar to a 401(k) or IRA in which you invest contributions in mutual funds or something similar. You can choose between various investment options and your account will either go up or down in value depending on various factors such as how much you contribute and how well your money grows.
A prepaid plan allows you to pay either a portion or all of the cost for tuition at a college in your state. These plans are guaranteed to increase in value at the same rate as college tuition, even if tuition rates double. For instance, if a parent purchased shares that are worth one semester’s cost of tuition, the shares will always be worth that amount. Ten or 20 years can pass and one semester’s worth of tuition would still be covered for, if paid through a prepaid plan.
Prepaid plan benefits
The biggest appeal to prepaid tuition plans is the fact that it locks in tuition rates. Whenever a parent decides to purchase shares they will lock in the current rate of tuition to help cover the cost of education. Locking in a rate can provide parents with more of a sense of security when investing in their child’s future, as opposed to deciding what type of investments may yield the most profits with a 529 savings plan.
When making prepaid tuition plan contributions there are two types. The first is a plan that can be purchased to cover anywhere from one to five years of tuition, and that can be paid for all at once or through installments. The second option allows for the purchases of units, which can equate to either credits or hours.
Although prepaid tuition plans do not initially cover the cost of tuition outside of the state, they can be converted to and then used to pay for out-of-state college tuition. The plan will pay for the average cost of in-state tuition and leave the family to pay the difference for out-of-state tuition. So if a family that resides in California has a prepaid plan for one semester’s worth of tuition, then it will cover that price and the student and his or her family will be responsible for paying the tuition fee for attending college in a different state. The same applies to students interested in attending private colleges, the investment will rollover and the family will be responsible for paying the difference.
Parents, relatives, and anyone interested in investing into a child’s future are all allowed to make contributions to prepaid tuition plans. This can provide benefits to close friends and family members who want to help pay for a child’s education.
529 plans in general offer great tax benefits. Every 529 plan allows you to avoid paying taxes on investment gains, just as long as the money is used for tuition, housing, or other fees. There are also more tax benefits for 34 states and the District of Columbia; residents in these places can claim a credit or deduction for either all or at least a portion of their contributions to a 529 plan on their state taxes.
If a child decides to not attend college then the 529 plan can be transferred to another family member without penalty. Parents can transfer their educational investment to another one of their children or family members to avoid facing penalty charges with their investment.
For more information on 529 tax benefits visit the FinAid website.
Already have student loan debt that you are having trouble paying off? Check out MyBankTracker’s guide to borrowing and paying off student loans.
Gerald is a staff writer at MyBankTracker.com. He is an expert in real estate, mortgages and credit.