| Save money while
saving for your child's education |
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More than a dozen states currently offer prepaid tuition
programs. Recently, many private colleges, including the most prestigious,
launched their own prepaid tuition program, Independent 529 Plan.
Currently there are 240 participating private colleges, according
to Independent
529 plan.org.
There's a good chance we'll see more private prepaid
tuition programs offered in the future. The tax law allows private
colleges and universities to develop their own prepaid tuition plans.
With a savings plan, parents open an account and
choose an investment strategy. They make withdrawals when it's time
to pay a son or daughter's college expenses including tuition, books,
and room and board.
"It's essentially a 401(k) dedicated to paying
for college expenses," Hunter says.
Loosening the requisites
Money from a state-sponsored college savings plan can be used to
pay for educational expenses at any accredited college or university.
"There's a lot more flexibility built into the
savings programs -- fewer restrictions," Joyce says. "You
can be a Maryland resident and use those savings to attend a school
in California."
Each savings program offers parents several different
investment choices. Because many state programs are open to nonresidents,
it makes sense for parents to shop around for a plan that best meets
their financial and educational needs.
"Most savings programs are open to nonresidents
so you can shop the different states to see what you fancy,"
Hurley says.
"You can find pretty much anything you want in
a 529 plan that you can get on the outside in the stock and bond
market."
A popular type of college savings plan begins with
some aggressive investments and grows more conservative as the potential
college student grows up.
"It automatically adjusts over time to a more
conservative allocation," Hurley says. "It's kind of an
autopilot college savings program."
Thanks to the recessed economy, many parents will
have to scramble to meet college costs. A parent invested in an
age-based college savings plan can breathe a bit easier.
"The ones who were hard hit were the ones with
young children and they have time to recover," Hurley says.
"The ones with older children were protected effectively."
Alternative uses of 529s
Speaking of protection, what happens if a potential college student
decides not to go to college?
A parent has three basic choices: hang on to the savings
plan, transfer it to another family member or cash out and pay a
penalty.
Some parents hang on to the 529 plan in case the child
decides to attend university at a later date. Others transfer the
account over to another family member.
Some parents decide to cash out the plan and pay a
penalty. Most states collect a penalty of 10 percent of the earnings
on any withdrawal that is used for non-educational purposes.
A federal penalty equal to 10 percent of earnings
will be charged as well. No penalty will be assessed if a beneficiary
should die or become disabled.
While the tax-free withdrawals clearly make 529 plans
attractive financial options, they may not be right for every family.
The reason? Participating in a 529 plan affects a family's eligibility
for financial aid.
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