The 529 Savings Plan is a fund that got its name from the section of the tax code that governs it.

This plan is helping thousands of Americans save thousands of dollars to pay for college; however,  which plan to choose and whose name in which to place the fund can make a difference on just how much savings you can accumulate.

Using a 529 Plan

Families can save large sums – in hundreds of thousands of dollars – while earnings accumulate tax-free and remain tax-free as long as the money is used to pay for college tuition or other qualified higher educational expenses.

 According to Education Data Initiative in their College Savings Statistics, more families than ever before are using a state 529 savings plan to save for college. The average amount saved in 529s is $28,953.

But surprisingly, a large group of parents still save for college using savings put in non-529 plans.

These are the people who are missing out on tax advantages offered by 529 accounts.

One of the top reasons parents have for not using 529 plans is their uncertainty about which savings plan to use.

If you are a parent reading this – get started by understanding the different types of plans available.

Prepaid or Savings Plans for College

Once you have decided that 529 plans are the right investment for you – how do you pick between a Savings Plan or Prepaid Plan?

For starters, you’ll need to understand the difference between the two.

Savings Plans allow you to contribute to mutual funds or similar investments. The plan usually has several investment options to choose from and your account value will fluctuate up or down depending on the performance of the investments you select.

Prepaid Plans let you prepay all or part of the tuition for college because they are guaranteed to increase in value at the same rate as college tuition. “For example, if a family purchases shares worth half a year’s tuition at a state college, these shares will always be worth half a year’s tuition — even 10 years later, when tuition rates may have doubled.” explains websiteFinAid.org.

College Savings as Gifts From Others

Though it is wise for grandparents to start a savings fund for the child of new, sleep-deprived parents, it is prudent that the fund ultimately be in the child’s or parent’s name.

Joe Hurley, creator of the popular website SavingForCollege, writes that a good percentage of 529 plans accept third party contributions to a student’s account.

There are, however, gift-tax consequences of grandparent contributions to the 529 plan.

Whether grandparents contribute to accounts owned by them, or to accounts owned by the parents or someone else, their contributions are a gift from them to the account beneficiary.

One of many companies taking the cue of letting friends and family gift money for college is InstaGrad, a twist on social networking that enables parents to ask for online contributions to their child’s 529 plans in lieu of birthday and Christmas presents.

“College debt is at an all-time high. At InstaGrad, we are trying to counter the culture of consumerism to offer a way to give the most important gift,” said founder Mauricio Idarraga, who remembers his disciplined parents buying him very few toys in sacrifice for saving for his college education.

Can 529 Funds Hurt Your Financial Aid?

Perhaps one of the most frequently asked questions college-bound families have when filling out their Free Application for Financial Aid (FAFSA) form is: Will the savings in my 529 plan hurt my child’s chances for receiving financial aid? How will this affect my Estimated Financial Contribution (EFC)?

Savings in a 529 might decrease a financial aid package by a slight fraction.

But, college admissions professionals and financial advisors agree that when colleges examine a family’s assets, they want to see that you have the ability to pay at least a portion of the tuition.

529 savings accounts are considered parental assets (whether they are in the parent or child’s name), so will be assessed at up to 5.64% and included in a family’s EFC.

“If you are 50 years old, and even if you have saved away $100,000 for your child’s college education, according to EFC calculations (from filling out a FAFSA form), that would only knock off around $3,000 from an average financial aid package,” says college affordability expert Fred Amrein.  “In the end, don’t take your chances and go into debt. Build up that savings.”

___________

Use R2C Insights to help find merit aid and schools that fit the criteria most important to your student. You’ll not only save precious time, but your student will avoid the heartache of applying to schools they aren’t likely to get into or can’t afford to attend.  

Use Compare College Offers (CCO), a crowdsourced solution to making sure your student is being offered the best college scholarship they can get. Enter your offers and compare.  All data is anonymous! 

Other Articles You Might Like:

Colleges with High Acceptance Rates

How to Pick a College That Loves You Back