What is a 529 Plan?

A 529 plan can provide an excellent vehicle for saving for the rising cost of college. It is named after the section of the IRS code describing the plan and it allows a sponsor's investments to grow, tax-free, until the recipient uses the funds to pay for expenses at a wide array of qualified colleges and universities. Though there are risks with 529 plans, the rewards can be significant. To describe the risks, rewards, and features, it is useful to discuss the two types of plans separately.

Savings Plans

A 529 savings plan operates similarly to the more familiar 401K in that the plan's sponsor generally makes periodic deposits into an interest-earning account over a period of years. Like the 401K, the interest earned by the account remains untaxed as long as it remains in the account, and also like the 401K, the interest earned may vary from gains to losses depending on market fluctuations. Unlike the 401K, there often is no cap on annual amounts of investment, so the sponsor can build the plan's value up quickly.

The plan specifics vary by state. Some, for example, do cap annual amounts of investment, but those caps are generally over $300,000. Some states allow the investment to be deducted from taxable income. Fees on the accounts vary widely per state and depending upon who manages the account.

Once the beneficiary enters college, the sponsor may order the withdrawal of funds to cover the student's recognized expenses which may include tuition, room, board, fees, books, and certain supplies. These withdrawals remain tax-free. They also, depending on the state, may cover expenses at colleges that are out-of-state for either the sponsor or the student. When the recipient finishes college, most plans allow the funds to be rolled over to cover college costs of other qualifying family members.

Pre-Paid Tuition Plans

Some states offer an alternative option: pre-paid tuition plans. In these programs, sponsors purchase tuition or tuition credits that are guaranteed to cover a certain amount of college tuition at a future date. Assuming the cost of college tuition will continue to rise at its current rapid pace, these plans may result in significant financial gain. They may also bring significant, uncovered expenses to the state, which is why Washington's Guaranteed Education Tuition program experienced an uncertain future recently.

Like a savings plan, a pre-paid tuition plan allows funds to grow tax-free as they wait be used for college. Unlike savings plans, pre-paid tuition plans can only cover the cost of tuition, leaving room and board, books, and supplies to be funded in other ways. Additionally, the pre-paid tuition plan is less risky, as the value of the tuition purchased is unlikely to descend much and, as the Washington legislature proved, the states are hesitant to close down these popular plans.

Disadvantages

With both types of 529 plans, the funds, once invested, become taxable and bear penalties if withdrawn for any other reason than to pay for college expenses. Thus, it may be wise to be conservative with estimates of the amount to be put away. Additionally, both types of plans impact a student's financial aid eligibility, possibly reducing the recipient's eligibility for need-based scholarships and grants.

Public College & University Data

Now there is a place to help you find out more information about the various public colleges and universities out there. There is a wide variety of statistics and data available on the various higher education systems across the country. Sometimes the data is collected nationally and sometimes it is local to each state. We provide our analysis of the education data that is available on higher education systems in the USA.

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