As the cost of college education continues to rise, it has become increasingly important for families to start saving for their children’s college education as early as possible. Many families rely on their children earning an athletic or academic scholarship. While scholarships can be a God send, they are not guaranteed. So it’s important to have a backup plan.
Sure, there’s always loans. However, loans are not always the ideal choice, are they?
What many people do not realize is that student loans are a machine composed of the government, banking industries, universities, and high schools who encourage young adults to take out loans for school. They promise you will earn the money back to pay off loans quickly and easily.
That is not always true and the act of numerous institutions coercing students into taking out loans to cover tuition and living expenses could be considered unethical. In many cases only the loan provider and university benefit, and the graduate is left with unmanageable monthly loan payments that can never be forgiven.
Do not worry! There is another option!
Today, one of the most popular and effective ways to save for college is through a 529 savings plan. You’ve never heard of them? Don’t worry! Let’s take a closer look at what 529 plans are, how they work, and the benefits they offer!
What is a 529 Savings Plan?
529 savings plans are tax-advantaged savings plans designed to help families save for college expenses. These plans are called 529 plans because they refer to Section 529 of the Internal Revenue Code created in 1996.
There are two different types of 529 savings plans: prepaid tuition plans and college savings plans.
Prepaid tuition plans allow you to pay for future college expenses at today’s prices which is wonderful, considering the cost of tuition climbs every year. While these plans don’t qualify in every state, or at every institution, it’s an amazing guarantee that future tuition and fees will be covered at qualifying universities, regardless of how much prices increase. Prepaid tuition plans offer struggling families a financially reasonable way to begin saving for their children’s college education. Right from birth, parents can eliminate the worry that no matter how much they save, they’ll never have enough to cover the cost of college.
College savings plans allow you to save for college expenses over time. These plans allow you to invest in a variety of different ways such as mutual funds, stocks, and bonds. These earnings are able to grow tax-free as long as you use the funds for education costs like tuition, books, and room and board.
How Do 529 Plans Work?
Like any other savings plan or account, you’ll just need to open your 529 savings plan and choose the option best for you. Something cool about 529 plans is that you are not limited to the plans that are offered in your state. You can choose the plan that best works for your family’s goals, regardless of where you live. Though, you should know that some states offer incentives for residents of those states and you should be aware of opportunities for you and your family.
Once your child is ready to go off to college, you can withdraw the money from the account without paying taxes on it, as long as it’s used for qualifying education costs. If you want to use some of the money for non-qualified expenses, you can do that, you’ll just have to pay state income tax and a penalty.
Benefits of 529 Plans
There are many benefits to investing in a 529 college savings plan including:
- Tax benefits: Like we discussed, this money is tax-free for qualifying education expenses which has huge benefits on your finances.
- Flexibility: The fact that you aren’t limited to 529 plans that are in your state of residence and that they can be used at such a large number of universities and trade schools is extremely beneficial.
- Professional management: The funds in your 529 plan are managed by investment professionals so you know that your money will be well taken care of by financial experts.
If you’re trying to avoid taking out student loans to pay for your children’s college education, a 529 savings plan is a great way to get a head start on tuition and could possibly help you avoid taking out loans altogether!
If you’re interested in starting a 529 savings plan or just want to learn more about them and if they’re the right choice for your family, contact Aha! Financial! We will work with you to determine your needs and the best education savings plan for you, even if that is not a 529 savings plan. We’re here and ready to help you define and reach your family’s educational goals!