As the cost of college rises, many students are having a rough time finding the money to pay for their education. One way of setting aside money for college is through a 529 plan, also known as a qualified tuition plan.
The concept of a 529 plan was formed through Section 529 of the Internal Revenue Code of 1996.
“A 529 plan is just like an independent retirement account, but it is used to cover tuition costs,” Ann D. McAleer, independent financial adviser, said.
A parent or grandparent may set up an account for a student. The money can only be used for education. One can contribute money into the account with after-tax dollars and the growth is tax-free.
“Just recently a client of mine put away $40,000 for their child’s education. They won’t have to worry about the money being taxed when the child needs the money,” McAleer said.
The 529 plan does not have to be set aside to only one child in the family. “If the child received enough money through scholarships and grants, the money could go to a sibling or even one of the parents. For instance, if the mother decides to take courses at a community college, she is welcome to the money,” McAleer said.
Since the economy is affecting many families, the use of 529 plans is decreasing. Families that are not making as much as they used to are not contributing to their funds. “The 529 plan is a discretionary contribution in which one has money that they can put away for later. If one does not have any money to contribute because it is a matter of food or funds, the family is going to pick the food,” McAleer said.
Instead of putting money directly into the account, some families choose to invest the account money into stocks to make it grow faster.
“People are starting to realize that relying on stocks is not always the safest thing to do especially when it comes to important money that will be used for education,” McAleer said. “Many have lost money in their IRAs because of the stock market.”
“New investors are being more conservative and playing it safe with their funds by not placing the money they need in the stock market,” McAleer said.
The savings in the account can be used for college credits, overall tuition, room and board, books and off campus housing.
There are two types of 529 plans called college savings plans and prepaid tuition plans. With the prepaid plan, one can purchase college credits at the current tuition rate.
“Prepaid plans are administered either by a state college or university,” McAleer said.
A savings plan consists of money put into the account or other investments such as stocks and bonds. If stocks are used, then the market plays a key role in whether or not the account grows in value.
“I think that the 529 plan is a really cool thing. It is a great way to save up for an education and be sure that you will have money available,” McAleer said.