529 College Savings Plans

So, You’ve Got Some Time to Set Aside Money for College Savings

The first option many people consider when looking at long-term college savings plans are the 529 College Savings Plans. A 529 College Savings Plan is an education savings plan operated by a state or educational institution designed to help families save for future college costs. These types of savings plans have been around since 1996 and, in case you were wondering, these plans are named after Section 529 of the Internal Revenue Code.

Two Types of 529 Colleges Savings Plans

When most people think of 529 Plans, it is usually the 529 College Savings Plan that comes to mind. With the college savings plans, you invest in various tax-favored, managed accounts and hopefully, if your investments grow, you have a nice nest egg of money available for your student's college education.

Many states or institutions also offer 529 Prepaid College Tuition Plans which allow you to pay for your student's future college tuition at today's rates. These plans are effectively a college lay-away plan and allow you pay for future college tuition at pre-inflationary prices today.

Long-Term Investments, Not Short-Term or Immediate Solution
The first thing to keep in mind about any college savings plan is they are long-term investments. They are not designed for the short term. That means if you have students in high school and you are just now researching college finance, then starting a college savings plan probably isn’t an appropriate option for you. College savings plans are designed to be started by families who still have several years to go before their student is ready for college. These programs strength lies in the time you have available to save.

Advantages of 529 College Savings Plans
One advantage of a 529 College Savings Plan is that the money available in the plan impacts your Expected Family Contribution at the parent rate of 5.6% and not the student rate of 20%, regardless of who is listed as the owner. For example, if the student has $20,000 saved for college, your EFC would go up by 20% of that, or $5,000. If that money was saved in a 529 Plan, that number would drop to $1,120.

Yet another advantage of 529 College Savings Plans to note is that you can transfer large sums of money into a 529 Plan en masse and without the maximum limit restrictions of IRAs or Coverdells. For example, if a child has a custodial account in the form of a Universal Gift to Minors Act (UGMA) or a Universal Transfer to Minors Act (UTMA) with, for example, $10,000, you can transfer that entire amount into the 529 College Savings Plan and it will impact your EFC at the parent rate of 5.6% instead of at the student rate of 20%. A big difference.

Disadvantages of 529 College Savings Plans
One disadvantage of college savings plans is that they need to be reported as an asset when you are completing your Free Application for Federal Student Aid (FAFSA). This means that any money you save in a college savings plan will ultimately increase your EFC. It may not be by a lot, but this is likely something that you haven’t read in any of the brochures but should be aware of when considering starting college savings plan.

IMPORTANT NOTE: There is a way to avoid having your 529 College Savings increase your expected family contribution. When you set up a college savings plan, you need to declare an owner (typically the parent) and a beneficiary (the student). However, if the student’s GRANDPARENT (or other non-immediate family member) is listed as the owner, then there is NO IMPACT on your EFC. Zip. Zilch. Nada. Depending on how much you’re able to save as part of your 529 College Savings Plan, this could have a huge impact on what you’re expected to contribute to your student’s education.