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With total student loan debt in the U.S. pushing past $1.5 trillion, millions of parents may be left scratching their heads over how to fund their children’s academic future.

There are a number of alternative ways to pay for college beyond student loans — but they require a bit of planning. One of the most viable savings vehicles that give account holders the best value are 529 college savings plans.

Utilizing a 529 college savings plan can be a great way to help your future student cut down on student loan costs. Plus, these special savings plans provide some valuable tax benefits, making them beneficial for the person paying into them as well.

What is a 529 plan?

A 529 plan is a college savings plan that offers both tax and tuition benefits. Earnings are not subject to federal income tax when the funds are used for qualified educational expenses such as tuition, fees, books, room and board, according to the Internal Revenue Service (IRS). Some states also provide tax credits or deductions for these plans, according to Savingforcollege.com. These savings plans can be used for eligible education institutions, like colleges, and for tuition at elementary and secondary schools.

Contributions to a 529 savings account are made post-tax, meaning they can’t be deducted from federal income taxes; however, over 30 states and the District of Columbia offer deductions or credits for these plans, according to Savingforcollege.com.

“This money grows tax-free and isn’t taxed when withdrawn to pay for college,” says Leslie H. Tayne, Esq., founder and director of the Tayne Law Group in New York. “And the good news is, you can use them for two-year colleges, trade or even vocational schools. It doesn’t just have to be for a four-year school.”

[READ: Get tips on student loans and colleges, and compare private student loan lenders.]

The two types of 529 plans

Not all 529 plans are the same. In fact, there are two types of 529 plans, and they have different means of holding your money and how you spend it:

  • College savings plans: These plans are similar to retirement investment accounts. With a college savings 529 plan, you deposit after-tax money, which in return is invested. These accounts are subject to market volatility but have the opportunity to grow beyond your deposits, thanks to professional investment management and compounding interest.
  • Prepaid tuition plans: Instead of investing money and letting it grow, prepaid tuition plans let account holders buy into all or part of the cost of an in-state public college education. These accounts can be used for private and out-of-state schools, but likely won’t cover all of the costs, since both types of institutions are usually more expensive than in-state options.

What is considered a qualified expense?

Whether it’s a college savings plan or a prepaid tuition plan, the funds can only be used for qualified expenses, or else they’ll be subject to penalty and potentially taxed on earnings.

Qualified expenses include: tuition and fees, books, supplies, equipment, expenses for special needs services, room and board, computers and internet access.

Megan Gorman, a personal finance expert and founding partner of Chequers Financial Management, says parents regularly ask her if things like travel costs and health care can be paid for with 529 savings — and the answer is no.

Another gray area? Off-campus living costs. These savings accounts can only be used up to a certain amount for off-campus accommodations, and each school will have a different amount. Gorman points out that the school’s bursar office will have detailed information with dollar amounts each year. She recommends keeping those documents on hand, should the IRS inquire about your 529 spending.

“Parents really have to be organized as they take distributions and keep records,” Gorman says. If not, they face a federal income tax on any earnings and a 10 percent penalty, on top of potential state penalties.

Step-by-step guide to opening a 529

Both Gorman and Tayne agree that parents shouldn’t be intimidated by opening a 529 plan; in fact, the process is relatively simple.

“The biggest hurdle for parents is there’s the fear of getting in there and you need someone to push you to do it,” Gorman says. “But the system is set up so well and there are so many cost-effective plans that do all the work — parents just need to open the account and put some money to work.”

Opening a 529 can be completed in (as little as) these four steps:

1. Select a plan

You’ll have to choose between a savings plan or a prepaid plan. According to Gorman, parents can open a plan with any provider, regardless of state — but she recommends prioritizing the quality and cost of the plan you choose to invest in first, and then consider any state tax benefits the plan may provide.

“This is important as you don’t want to invest in an expensive plan that underperforms just because of the tax benefit,” Gorman says.

If you aren’t sure which provider or plan works best for you, consider contacting a financial adviser for advice.

2. Choose a beneficiary

This will likely be your child — but remember, you can change the beneficiary at any time without penalty. You will need the beneficiary’s date of birth and Social Security number. Since most plans have age-based options, meaning they have a target-allocated fund that reallocates based on a child’s age, it’s best to open an individual account for each child.

3. Open the account

Most accounts can be opened online.  Once opened, you can deposit funds directly into the account (some plans require a minimum deposit for opening.) Be sure to keep an eye out for any fees associated with providers and plans; there can be annual fees, account opening fees and percentage fees. Always read the fine print.

4. Build your portfolio

If you’ve chosen a savings plan, you can choose where to invest your money. Most providers offer both actively and passively managed investments, says Gorman — but she recommends using aged-based funds.

“These funds are similar to target retirement funds,” Gorman says. “They automatically adjust the asset allocation based on the child’s age.”

If you need help, some plans have advisory fees — but be sure to review these beforehand.

“It’s really easy — you don’t need to be sophisticated or need someone who is sophisticated to open it for you,” Tayne says. “Don’t be discouraged because it sounds complicated, because it’s not.”

[SEE: Bankrate’s college savings calculator can help you figure out savings goals]

Important IRS and plan rules to know

Since 529 college savings plans provide tax incentives, the IRS writes strict rules to ensure they aren’t being taken advantage of.

While contributing to a 529, keep these important rules and restrictions in mind:

Anyone can be named a beneficiary, including yourself, and there is no limit to how many plans you can set up.

Contributions cannot be more than the amount needed to provide for qualified expenses of the beneficiary, according to the Securities and Exchange Commission (SEC). The SEC also cautions to “be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $15,000 during the year.”

Gorman does point out, though, that most Americans won’t come close to reaching the maximum contribution.

“Parents get very apprehensive that they’re going to overfund a plan — but most people don’t even really get close,” Gorman says. “So overfunding really should not be of concern.”

Balances in 529s could affect financial aid rewards. Balance amounts are taken into the expected family contribution (EFC) amounts, but Gorman points out the calculation used will vary, depending on who owns the account. For example, if a parent owns the account, the amount considered in the family contribution is around 5 percent; if someone else were to own the account, like grandparents, distributions could reduce eligibility for need-based aid by as much as 50 percent. If the student owns the account, eligibility could be reduced by as much as 20 percent of the asset value.

“It does seem a bit draconian, especially in the day and age where college costs are so high and it really, truly takes a village.” Gorman says. “It’s a bit unfair, but they’re trying to make sure people don’t start gaming the system.”

Gorman adds, however, that considering financial aid implications should “never be a deterrent” when choosing to open a 529 plan.

What happens if your child doesn’t go to college

Since a 529 savings account is specifically for educational costs and provides tax benefits, there will be penalties if the money is not used for its intention. According to the IRS, withdrawn funds used for anything other than tuition and qualified expenses will be subject to income tax and face a penalty on the earnings.

There are, however, instances when these penalties may be waived, including:

  • The beneficiary receives a tax-free scholarship.
  • The beneficiary attends a military academy.
  • The beneficiary dies or becomes disabled.

If your child chooses to scrap higher education altogether, you won’t lose the money in the accounts. Instead, you have the option to change the beneficiary — which you can change to yourself for future education or for grandchildren. Anyone can be named a beneficiary, and there aren’t any rules capping a limit on how many times a 529 plan beneficiary can be changed.

Bottom line

Overall, 529 college savings plans are viable options for people looking to grow savings for educational costs.

The most important thing to keep in mind about 529 plans, says Tayne, is that they should be opened as soon as possible, giving the money time to grow. She acknowledges that this can be difficult for young parents who are early on in their careers, citing her own experience.

“When my kids were little, I didn’t have the money to spare,” Tayne says. “So I think what ends up happening is that unfortunately, when you have little kids, it might be difficult to put money into the account each month. But honestly, it’s never too late to open (a 529 savings plan).”

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