Whether you're a parent who wants to send your child to your dear old alma mater, or a grandparent who wants to foot the bill for an Ivy League degree, you're going to want to utilize a smart strategy to help maximize your savings.
And if you're thinking about putting money away for college, you've likely considered a 529 plan. These tax-advantaged savings vehicles were specifically designed to help families prepare for future higher education costs. But did you know that there are two different types of 529 plans? The more popular 529 savings plans are investment accounts that operate much like your IRA or 401(k), where your account value will go up or down based on the investments you select. But the lesser known, but just as effective, prepaid plans allow you to pay for future college tuition at today's rates.
College is one of the biggest expenses a family will ever face. In some cases a four-year degree could cost more than a home. But imagine being able to buy something today, but only having to pay what it was worth 18 years ago. Sounds like a great deal, right? A prepaid plan allows families to do just that, only with college tuition and fees. According to the College Board, the average cost of tuition and fees at private colleges and universities has been rising 3.6 percent per year. So while your neighbor could end up spending over $56,000 on their child's first year of school in 18 years, you'd only be paying today's cost of $30,000 if you prepaid with Private College 529 Plan.
Prepaid 529 plans give families peace of mind when it comes to planning for the future, and could help reduce or even eliminate the need to borrow for school. Here are a few more ways a prepaid plan can help boost college savings and keep your child out of debt.
Just like 529 savings plans, prepaid 529 plans offer tax-free growth and tax-free withdrawals when the funds are used to pay for qualified higher education expenses. Some states also offer residents an additional tax deduction or credit for contributions to a prepaid 529 plan. Over time, these tax savings can really add up and help get you closer to your savings goal.
Even families who diligently save for college may still end up with a shortfall. Financial aid is one way to help bridge the gap, but it's important to understand how much you'll be eligible for. 529 plans, both prepaid and savings, receive favorable treatment on the Free Application for Federal Student Aid. When a dependent student or their parent owns the account, only a small percentage of assets are counted toward the Expected Family Contribution (EFC). And lower EFC means more financial aid. What's more, withdrawals used to pay for college have no effect on financial aid eligibility.
Contributions to a prepaid 529 plan are considered gifts for tax purposes and qualify for the annual exclusion. That means in 2017 parents and grandparents can gift up to $14,000 to a single beneficiary. And while the money will be removed from their taxable estate, the parent or grandparent will retain control of the account.
Those looking to give a larger gift have the option of contributing as much as $70,000 and treating the gift as it were made over a five-year period. This allows you to shelter a larger contribution and get money out of your estate faster.*
Unlike a 529 savings plan, where your balance is directly tied to stock market performance, a prepaid plan (or the state that administers it) will assume any investment risk. The amount of tuition you purchase will remain the same, no matter what's happening on Wall Street. But you don't have to choose one type of plan over the other, A balanced savings portfolio is an effective way to finance a college education, and Private College 529 can be an excellent complement to a 529 savings plan.
* If the account owner dies before the end of the five-year period, a prorated portion of the contribution allocable to the remaining years in the five-year period, beginning with the year after the contributor's death, will be included within his or her estate for federal estate tax purposes.