For many young people, college is an exciting time full of unlimited potential that allows you to “find yourself” and chart out a career path upon graduation.
Still, the financial strain of paying for tuition, housing, and everyday expenses can make it harder to earn a degree. In fact, 70% of college students feel financial strain and stress while trying to focus on their studies.
Fortunately, there’s a smart and easy way to start saving early for your or your child’s college education: a 529 plan. These tax-advantaged plans serve as education investment accounts, with special rules and tax benefits to help families save for college — and even for K-12 tuition.
Read on to learn more about whether a 529 plan is right for you and your life circumstances.
1. What Is a 529 Plan?
A 529 plan offers beneficiaries a way to pay for education-related expenses, including tuition, books, and room and board. There are two types of plans — Prepaid Tuition Plans and Education Savings Plans — and both are offered in all 50 states. Prepaid Tuition Plans allow students to pay for college credits at present-day rates to be earned at a future date. Meantime, Education Savings Plans allow contributions over time to pay for qualified educational expenses.
2. Where Do I Want to Attend College?
This is an important question to answer before determining if a 529 plan is right for you. That’s because the Prepaid Tuition Plans option only applies to participating colleges and universities, most of which are public. Additionally, understanding the total costs you’ll need to pay for tuition, as well as room and board, will help you determine if you’ll be able to meet those costs through financial aid, or if a savings plan
3. How Much Financial Aid Will I Qualify for With and Without the Plan?
Financial aid is a big consideration when determining if a 529 plan is the right choice for you and your future educational goals. When applying for financial aid, you’ll be asked to include an amount called the Expected Family Contribution (EFC), and this amount will be used in the calculation of how much financial aid you qualify for. Your 529 plan contributions will affect the EFC and may lower how much financial aid you receive.
This means the money you contribute to a 529 plan might mean you receive fewer subsidized loans, federal grants, and work-study opportunities when applying for federal financial aid. If you plan to rely heavily on these federal programs, consider meeting with a financial aid advisor to discuss how a 529 plan will affect your eligibility first.
4. What are the Qualified Withdrawals for a 529 Plan?
Before investing in a 529 plan, make sure you understand the exact types of withdrawals that will qualify as covered educational expenses. The most common expenses students have, including tuition, room and board, and books and supplies, are considered qualified withdrawals, which means you won’t be taxed or penalized for making them.
However, if your college experience will include other expenses, such as fuel for a long commute or off-campus housing, there are limitations on these types of withdrawals that could end up costing you a lot more than you anticipate. That’s why it’s always a good idea to speak with a financial advisor or your 529 plan administrator about your exact situation before investing a lot of money into the savings plan.
Know Before You Buy
As with any financial decision, making the right choice for your unique situation involves a lot of research and questions on the front end. Knowing which college you plan to attend and what your housing situation will be like are both crucial pieces of information that can help you make the best decision about whether a 529 plan is the best choice for you.