Pros And Cons Of 529 Plans

Pros and Cons of Prepaid Tuition Plans

Parents seeking an investment safe haven that provides guaranteed returns may not find one in prepaid tuition plans. Long touted as a no-risk way to save for college, prepaid plans generally allow parents to purchase college credits at slightly above current market prices, and then cash them in when their child heads off to school.

Some investors predict that prepaid plans may be a thing of the past in coming years. Since 2008, several prepaid plans have either closed down entirely or stopped new enrollment, as Tennessee recently did.

The 10 remaining state-run prepaid plans and one independently operated plan provide good value, but also come with restrictions on where funds can be used and questions about whether funds are safe. Here's what you need to know before investing in 529 prepaid tuition plans.

On paper, prepaid tuition plans are an outstanding value. According to financial aid website FinAid.org, college tuition costs increase approximately 8% each year. The average cost of one year at an in-state public school today is $19,388 for tuition, fees, room and board according to The College Board, a nonprofit education organization. And private school students pay an average of $39,028. Assuming tuition rate increases continue at the current pace, a baby born this year will pay $77,475 for his or her freshman year at a public college. Those attending private colleges or universities will pay $155,957 just for their first year of school.

"Many of the Colorado schools have raised their tuition 10 (%) to 12%. In California, we're seeing increases of 10 (%) to 30%," says Jeffrey P. Morand, a certified college planning specialist and president of JP Morand & Co., a college planning firm in Englewood, Colo. Morand says that with tuition prices increasing so quickly, prepaid plans frequently offer greater value than other college savings vehicles.

Prepaid plans offer nice tax incentives, too. As is the case with 529 college savings plans, funds stored in prepaid plans are exempt from federal income tax if the plan holder uses them for qualified education expenses, according to the Internal Revenue Service. Depending on your state's regulations, consumers invested in a prepaid tuition plan may also get a state tax deduction as well.

For parents who watched their children's 529 college savings plans plummet when the market dropped in 2008, the fiscal benefits of a prepaid plan are secondary to the security they provide. Unlike 529 college savings plans where investor money is directly tied to stock market fluctuations, states frequently assume the risk in state-run prepaid plans. The exception is Texas, which places the risk on colleges themselves. The nation's sole independent prepaid program -- the Private College 529 Plan -- offers prepaid contracts through more than 270 private colleges throughout the U.S. and puts the risk on the colleges, too.

Day #262: Pros and Cons to the 529 College Savings Plan – 365 Days ...

Pros and Cons to the 529 College Savings Plan

529 college savings plans have garnered tremendous attention from savvy planners and financial advisors, especially around tax time. These types of savings plans are essentially tools for building money for your child’s college education. The biggest benefit of a 529 college savings plan is the tax break, but they also have several other features – some positive, some negative – that should be explored before opening an account.

Pros of a 529 College Savings Plan

There are many advantages to a 529 college savings plan, including:

Tax Benefits – The biggest advantage of a 529 college savings plan is the tax benefits. Any money put into a 529 plan grows tax-deferred, and any distributions that are withdrawn to pay for your child’s college education are also federally tax-free. Tax Breaks – You may also find that your state will also offer tax breaks for your 529 college savings plan. For example, your state may offer you an upfront deduction or even income exemptions on withdrawals – and that’s on top of the federal tax breaks. Of course, each state will offer different benefits through their 529 college savings plans, so do your research to find which benefits your state offers. Parental Authority – Many parents really enjoy the fact that 529 college saving plans allow them to remain guardian over the money from beginning to end. In short, as the parent, you control when, how and under what circumstances the money is withdrawn. Easy Savings – Saving for college under a 529 plan is simplified. Aside from filling out a simple enrollment form, there is not much to do when saving under a 529 college savings plan. You can even set up automatic deductions to really simplify the process! These college savings plans are professionally managed through either your state or an outside investment company, so essentially your only responsibility is to pay into the account. No Tax Headaches – There is no filing a Form 1099 with a 529 plan. In fact, you won’t need to report any earnings until you begin making withdrawals.

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