Saving For a Kid’s College? Choose the Right Plan for You!

Let’s face it… college is expensive. And it might getting worse.

The average cost of college tuition rose four times the rate of inflation between 1985 and 2011. With private colleges charging an average of over $35,000 a year for tuition and in-state tuition at a state school averaging about $10,000, affording college isn’t always easy. Yes, you can transfer your post 9-11 GI Bill but what if you have multiple children? What if you’ve already used it? Luckily, there’s a savings plan called the 529 plan that helps you save just for this situation.

A 529 plan is a tax advantaged savings plan designed to encourage savings for future education costs. There are two types of plans: prepaid tuition plans and education savings plans. Every state participates in at least one type of plan.

Prepaid tuition plans allow parents or guardians to pay into an account at the current rate for credits at a certain school after designating a beneficiary (usually their child). This protects investors from future increases in the cost of tuition. Once popular, these plans have reduced in number and are now only offered by only 11 states. Additionally, they are primarily offered for public schools and the beneficiary must attend an eligible public school in that state. One bright spot: as an active duty military member, adjusting your state of residency is not very challenging. You can choose the state that works for you. Therefore, you have multiple potential options when it comes to choosing a state with a prepaid tuition plan.

Education savings plans allow an individual to open an account on behalf of a beneficiary and invest for future education expenses to include tuition, mandatory fees, and room and board without being taxed on returns. Education savings plans can be used to pay up to $10,000 per year per beneficiary towards those costs depending on the state. Maximum limits depend on the state as well. South Carolina’s maximum, for example is $500,000 while Texas’ maximum is $370,000.

529 plans can be used (tax free) to pay for tuition fees, mandatory fees, and room and board!

What’s the downside? If the beneficiary doesn’t go to college and the money is withdrawn for other uses, the returns are taxed and a 10% penalty is added as well. However, there are multiple ways to avoid this penalty (transfer to another family member etc.) and the education plan can be used if the beneficiary chooses to go to college later in life. Additionally, the plan cannot be implemented for planned or expected children.

A few other state-related benefits to consider (thanks to the higher education opportunity act):

  • Members of active duty military families qualify for in-state tuition both in their state of legal domicile and the state in which they actually reside
  • If the family moves while the student is in college, in-state rates still apply in the state in which the student is attending college
  • Once the family moves to another state, the third state can also serve as the “state of residency” for in-state tuition purposes

It is important to research your options to make the decision that makes the most sense for you and your family. Take a look at some of the links in this article for additional information. $

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