Most parents consider college an important investment in their child’s future. However, covering its costs can be difficult. According to Sallie Mae, Americans spent an average of $26,226 for the 2018-2019 academic year. Nearly a quarter of them (24 percent) had to borrow money to do so. Given this fact, it’s easy to see why graduates of four-year colleges owe an average of $29,000 when they enter the workforce.
It’s a burden that is only going to get worse. College Board data also shows that tuition and fees at colleges and universities continue to increase. In fact, between 2019 and 2020, the average published tuition and fee prices at public four-year institutions has risen by $2,020 per year.
Fortunately, there are tools parents can use today to make college more affordable for their children in the future. One such tool is a qualified tuition plan, also known as a 529 plan. These plans are tax-advantaged savings plans sponsored by states, state agencies, and educational institutions.
What is a 529 Plan?
There are two varieties of 529 plans: prepaid tuition and education savings. While the education savings plan variety is probably better known, a 529 prepaid tuition plan may be a more comfortable option for parents who are concerned about market fluctuations and the continually rising costs of obtaining a college education.
As its name implies, a 529 prepaid tuition plan allows you to pay for your child’s tuition and fees at a public, in-state college or university well in advance. But its usefulness goes much further than that, as the purchase is made at today’s tuition prices.
Furthermore, unlike a 529 education savings plan, the funds you deposit are not invested in a portfolio that will grow or shrink in value based on market performance. Instead, they’re guaranteed by the state sponsoring the plan and, in many cases, their full value is protected from market fluctuations.
Additional 529 Prepaid Tuition Plan Benefits
In addition to protecting your investment from market turbulence and allowing you to lock down the cost of your child’s future tuition and fees, 529 prepaid tuition plans offer other benefits including:
- Flexible contributions through installments or as a lump sum.
- Tax-free earnings growth and tax-free withdrawals for tuition and fees.
- Depending on the state, you may qualify tor tax deductions or credits on your prepaid tuition plan contributions.
- Investment is guaranteed to keep pace with inflation, and there are generally no income limits.
- A high contribution limit with the maximum determined by the state sponsoring the plan.
- Minimal impact on other financial aid.
- These plans are transferable if your child is awarded a large scholarship or decides not to attend college at all.
529 Prepaid Tuition Plan Disadvantages
Of course, as with any financial product, 529 prepaid tuition plans also have disadvantages:
- The enrollment window is limited to once a year. If you miss the deadline, you’ll have to wait until the next enrollment period.
- You may have to pay an enrollment or application fee in addition to ongoing administrative fees.
- You or your student must be a resident of the state sponsoring the plan and attend a public college or university in that state.
- Room and board, books, and other supplies are not considered qualified expenses.
- Withdrawals for non-qualified expenses can result in a 10 percent penalty as well as federal and state tax implications
- If your family moves to a new state before your child enrolls in school, or your child wants to attend an out-of-state school, you will not receive the full benefits of your plan.
Consult Your Financial Planner Today
If you’d like to save for your child’s future education and reduce the financial burden of paying for a college degree he or she will have to bear, it may be worthwhile to speak with a financial advisor about a 529 prepaid tuition plan as well as the alternative savings vehicles available.
For some parents, a 529 education savings plan may be a better option. Others choose to go with a brokerage account, custodial account, or borrow against cash-value life insurance. Your financial advisor will help you evaluate all the options and choose the best tool for your situation.
