Planning for College with a 529 Account


By Jayne Berkaw This is the time of year when the reality of impending college life begins to dawn on many high school seniors, and the reality of its costs weighs heavily on their parents.  Hopefully, saving for college has begun early for both parents and kids.

In the late 1980’s, to ease the financial burden of college on families, some states set up plans to assist parents and students in saving for college.  Our state was one of those, and we took advantage of it for our children (in fact, our last college student is still reaping the benefits of the Michigan Education Trust).  Then in the late 1990’s, a bipartisan effort in Congress led to the creation of Section 529 of the Internal Revenue Code.

A 2001 tax act exempted earnings of 529’s from federal taxation, cementing a federal/state partnership that promotes college savings, freeing families from relying on loans to pay for college. More than a million students have saved millions through these programs since.

We have set up 529 accounts, and provided a small starting investment, for each of our four grandchildren, and we are not alone.  A 1999 Fidelity Investments found that nearly two-thirds of grandparents indicated a willingness to contribute to their grandchildren's college savings accounts.  What’s so good about the 529?

  • While the MET we used for our children was specific to tuition and fees, the 529 can be used for books, supplies, room and board, and other expenses at accredited U.S. colleges, universities or vocational schools, and at some foreign schools.  There are some qualifications, but generally, it’s a great deal.
  • The growth in earnings of a 529 is tax-deferred and distributions for college expenses are exempt from Federal and some state taxes.
  • 529’s are a reliable, easy way to save for college. Plans are professionally managed by your state’s treasurer’s office or an outside investment company employed by the program manager. Plus, 529s are open to anyone, no matter what the age or income level.
  • Unused amounts from the plans can be transferred to other, qualified family members without a tax penalty. So kids waiting in the wings can have their own 529 and still benefit if student #1 doesn’t use all of theirs. It can also be used by parents for their continuing education.

There are two types of 529 plans: prepaid and savings. With prepaid plans, you purchase tuition credits, at today's rates, for future use. With savings plans, growth is based upon market performanceof the investments, which is usually mutual funds, but there are other options from which to choose. There are advantages and disadvantages to each, so like any investment, you need to do your homework.

The price of college continues to go up; around $9,000 for tuition and fees alone at four-year undergraduate schools, and $35,000 or more at private schools, according to the College Board.  Be sure there are no surprises; discuss these costs with your children, decide what they will be responsible for and get them on board (a account with a college goal is an excellent place to start!)

No matter how your family prepares, it pays to start early – and the first week of life isn’t too soon.