Not sure which college savings plan is right for you? See also NerdWallet’s Best 529 Savings Plans of 2013.
The cost of college tuition rises almost exponentially every year. Even though some states have put tuition caps on state-run colleges, that 6 or 7% each year doesn’t mean much when you’re looking at a multi-year span. Look at it this way: is a state-run college costs $9,000 a year now in tuition costs alone, what will that charge be in 18 years when your newly-born infant is graduating from high school and planning on attending college? Just thinking about it is scary.
This is why you need to start saving for your children’s college tuition now. The best way to do so is with a 529 plan. These plans are designed to help you make college more affordable for your children, and if they are set up in the child’s name, they won’t necessarily count as income on a FAFSA, and therefore won’t impact your child’s available financial aid amounts.
What is a 529 Plan
A 529 plan is similar to an IRA. They are set up with financial institutions and are designed so that you can put a certain amount of money into them each year. Your local bank more than likely offers one, as they are available in almost all of the 50 states. They also earn interest, so you’re doing more than simply stashing away money for college – you’re earning a little bit each year as well.
Once your child reaches the age of 18 and decides to go to college, he or she can use the money in his or her 529 account to pay for tuition costs. With a standard 529 plan, these funds are good for any accredited college in the country. However, it gets more interesting when you look at the prepaid 529 plan. This plan is set up in conjunction with a certain school or group of schools. These types of 529 plans include a contract that guarantees that you’ve paid for a certain number of school years or college credits with that school.
529 Contribution Limits
There are limits as to how much money can be put into a 529 plan, and this depends on the type of plan that is chosen. A standard college savings 529 plan can be used for all college expenses, for example, room and board, books, and living expenses, not just tuition. Because of this, the contribution cap on this version of the plan is over $200,000, although this can vary depending on the state that you are in.
The other type of 529 plan, in which tuition or credits are prepaid, has a number of contribution limits depending on which prepaid plan you have chosen. Some have yearly limits, while others are dependent on the number of years of tuition or credits. Unlike the standard 529 plan, the funds in prepaid ones can only be used for tuition and mandatory expenses.
A 529 plan can be a lifesaver for college students and their parents. Having one in place prevents everyone involved from getting stressed out over the cost of tuition and books, and gives the student a chance to focus on his or her studies – not how he or she is going to pay for the next semester’s worth of classes.
Disclaimer: This article is a part of NerdWallet’s series of user perspectives on 529 Plans. The views and recommendations in this piece are held by the individual contributor and do not necessarily reflect the opinions of NerdWallet as a whole.