However, the 529 Plan is one way to save for college studies. There are two types of 529 plans: the 529 savings plans and the 529 pre-paid tuition plans. These are operated by states or by educational institutions and are designed to help families set aside funds for future college costs. The federal tax laws also provide special tax benefits to the plan participant.
The 529 savings plan is more flexible than the 529 pre-paid plans, because the full value of a 529 pre-paid plan may only be applied to educational institutions in-state. This means that, in some cases, the full value of 529 pre-paid plans cannot be used up, but there is no such restriction in 529 savings plan.
For each of these plans, there is a donor and a beneficiary. There can be more than one donor for a plan, but only one beneficiary. A beneficiary can have more than one account. The donors can be parents, grandparents, or any other family member, but only one person—the owner—can receive tax incentives under the plans. The donor can also be the beneficiary of the 529 plan.
The major advantages of a 529 plan are income-tax benefits, tax-deferred growth on investment, tax-free distributions to pay college fees, donor control over the account, and donor control over unused funds. Over and above this, various investment options are available to individuals participating in the 529 plans. The choice of investment options should be made after considering the age of the beneficiary—how far in the future the money will be required.
Tuition costs have grown faster than inflation. Therefore, saving for college study must grow at a rate which outpaces tuition costs. Investing in stocks and/or equity is typically the way to do this.
This investment may be slowly shifted to bonds and cash as the child nears college age. This will protect the returns on the investment and the downside risk in equity-based mutual funds, still saving for college. The funds in the account remain under the control of the owner until they are used to pay for post-secondary tuition, but if these funds are unutilized, the owner can withdraw them.
A 529 savings plan can be opened with small contributions, but there is a cap on the maximum investment that can be made. Contributions can be made in a lump sum or small, regular payments. A new U.S. law, the Deficit Reduction Act of 2005, promotes saving for college under a 529 plan, preventing a 529 account from being treated as a student asset on a FAFSA form filed by a dependent student. This means the student will be eligible for higher financial aid.
