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Saving For College with 529 Plans


Wednesday, August 1, 2007
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As another school year ends, college tuition payments are now another year closer. Parents often wonder when they should start saving and how much.

College tuition and fees are costly and on the rise. Even with 4-year private schools running on average $30,000 per year, the cost is well worth it. According to the US Census Bureau, individuals with a bachelor’s degree earn more than double those with just a high school diploma.

How much to save depends on how much you think your child’s education will cost. The best way is to start saving before they are born. The sooner you begin, the less money you will have to put away each year.

Example: Suppose you have one child, age six months, and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7%). On the other hand, if you put off saving until the child is six years old, you’ll have to save almost double that amount every year for twelve years.

Another advantage of starting early is that you’ll have more flexibility when it comes to the type of investment you’ll use. You’ll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments in the long-run.

How Much Will a College Education Cost?

Based the survey completed for the 2006 Trends in College Pricing, the average cost for tuition, fees, room and board for 2006-2007 was:

    $12,796 per year for 4-year public colleges and universities.
    This is an increase of 6.3% from 2005-2006 findings

    $30,367 per year for 4-year private colleges and universities.
    This is an increase of 5.9% from 2005-2006 findings

It should also be noted that on average, full-time students receive $9,000 of financial aid per year in the form of grants and tax benefits for private 4-year institutions, $3,100/yr for public 4-year institutions, and $2,200/yr for public 2-year institutions.

Section 529 Qualified Tuition Plans

Many parents are looking at ways to save for college. In 2000, Section 529 plans, also known as Qualified Tuition Programs (QTP) became a popular college savings vehicle for parents.

Every state now has a program allowing persons to prepay for future higher education, with tax relief. There are two basic plan types, with many variations among them:

 1.The Prepaid Education Arrangement. Where one is essentially buying future education at today’s costs, by buying education credits or certificates. This is the older type of program, and tends to limit the student’s choice of schools within the state.

 2.Education Savings Accounts. Where contributions are made to an account to be used specifically for future higher education.

Tip: When approaching state programs one must distinguish between what the federal tax law allows and what an individual state’s program may impose.

You may open a Section 529 program in any state. But when buying prepaid tuition credits (less popular than savings accounts), you often need to apply the credits to a specific college or group of colleges.

Unlike certain other tax-favored higher education programs, such as the Hope and lifetime learning tax credits, federal tax law doesn’t limit the benefit only to tuition. Room, board, lab fees, books, and supplies can be purchased with funds from your 529 Savings Account. (Individual state programs could be narrower.)

The two key individual parties to the program are the Designated Beneficiary, the student-to-be, and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program.

There are no income limits on who may be an account owner. There’s only one designated beneficiary per account. Thus, a parent with three college-bound children might set up 3 accounts. (Some state programs don’t allow the same person to be both beneficiary and account owner.)

Contributions must be in cash, and must not total more than reasonably needed for higher education (as determined initially by the state). Neither account owner nor beneficiary may direct investments, but the state may allow the owner to select a type of investment fund (e.g., fixed income securities), and to change the investment annually, and when the beneficiary is changed. The account owner decides who gets the funds (can pick and change the beneficiary) and is legally allowed to withdraw funds at any time, subject to tax and penalty discussed later.

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About Chuck Chuckuemeka

Chuck is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising.

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