This comprehensive college savings guide will help you decide if a 529 plan is the right investment choice for you.
If you read our piece about how to get free money for college, you know that the US education debt is massive. With the average length of student loan payoff being 18.5 years, it is important to consider different options to fund a college education.
Loans can be an enticing option: they are relatively easy to sign up for and are almost guaranteed. But the benefits of graduating debt-free are huge! As first-generation college graduates, graduating without debt accelerates the path towards generational wealth. And when the wealth gap is as large as it is, every step you actively take to build generation wealth is crucial.
Scholarships are a great way to avoid student loans. Check out our podcast episode with Yaritza to understand why Latinx, POC and first-generation college students should always apply for scholarships. But while there are plenty, they are also not guaranteed, so it’s important to have a backup plan for saving for college. This is where a 529 college savings plan can come in handy.
Read on to learn about how to save money for college using a 529 college savings plan.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed to help pay for education. Originally limited to post-secondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019. The money in a 529 plan may be used to pay for the college expenses and K-12 tuition of the beneficiary, tax-free.
The two major types of 529 plans are savings plans and prepaid tuition plans. Savings plans grow tax-deferred, and withdrawals are tax-free if they’re used for qualified education expenses. Prepaid tuition plans allow the account owner to pay in advance for tuition at designated colleges and universities, locking in the cost at today’s rates. 529 plans are also referred to as qualified tuition programs and Section 529 plans.
Each state offers its own slightly different variation of a 529 Plan, but keep in mind that your state of residency does not dictate where you can open a 529. You are eligible to open a 529 account with any of the state administered plans. Be sure to research and compare your options. Some state plans might be better than others!
Prepaid Tuition Plan
This plan lets you prepay tuition for eligible state public schools. There are also private tuition plans for private schools. Not all states provide this option, we’ve provided a options below.
Which States Offer Prepaid Tuition Plans?
The 11 states listed here either offer prepaid tuition plans that are open to new enrollment or have temporarily suspended enrollment, while they await legislative action or the introduction of a replacement plan. Other states that once offered prepaid tuition plans continue to honor their obligations to past enrollees.
|State||Name of Plan||Notes|
|Florida||Florida Prepaid College Plan|
|Illinois||College Illinois! 529 Prepaid Tuition Program||Currently closed to new enrollment, pending legislative action.|
|Maryland||Maryland Prepaid College Trust|
|Massachusetts||MEFA U.Plan Prepaid Tuition Program.||Although technically not a 529 plan, it works much the same way.|
|Michigan||Michigan Education Trust|
|Mississippi||Mississippi Prepaid Affordable College Savings (MPACT) Program|
|Nevada||Nevada Prepaid Tuition Program|
|Pennsylvania||PA 529 Guaranteed Savings Plan|
|Texas||Texas Tuition Promise Fund||Its predecessor, the Texas Guaranteed Tuition Plan (formerly the Texas Tomorrow Fund), is closed to new enrollment.|
|Virginia||N/A||Virginia closed its Prepaid529 program to new enrollment as of May 1, 2019, but the state reports on its website that it is developing a “new similar program.”|
|Washington||Guaranteed Education Tuition (GET)|
Where to find prepaid tuition plans
These plans will be accepting new applications during their specified enrollment periods:
- Florida Stanley G. Tate Florida Prepaid College Plan
- Maryland Senator Edward J. Kasemeyer Prepaid College Trust
- Massachusetts U.Plan
- Michigan Education Trust (MET)
- Mississippi Prepaid Affordable College Tuition (MPACT) Program
- Nevada Prepaid Tuition Program
- Pennsylvania 529 Guaranteed Savings Plan
- Texas Tuition Promise Fund
- Washington Guaranteed Education Tuition (GET)
- Private College 529 Plan
529 College Savings Plans
529 College Savings Plans are very similar to a Roth IRA retirement account. You contribute post-tax income into the plan, decide where you want to invest your contributions (you get a choice of a variety of investment options) after funding the account. Your invested contributions grow tax free. Each 529 plan account has an account owner, who controls the investments and selects the beneficiary, and one beneficiary. The account owner and beneficiary may be the same person.
The money in the account grows on a tax-deferred basis until it is withdrawn. As long as the money is used for qualified education expenses, as defined by the IRS, those withdrawals aren’t subject to either state or federal taxes. In the case of K-12 students, tax-free withdrawals are limited to $10,000 per year.
Who can Open a 529 Account?
Anyone can open a 529 account, but they are typically established by parents or grandparents on behalf of a child or grandchild, who is the account’s beneficiary. In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.
Why You Should Consider a 529 Plan
The benefits of the 529 Plan when compared to any other college savings option lie in its tax and financial-aid benefits.
- Financial aid eligibility is minimally impacted
With a 529 Plan, your eligibility for receiving financial aid (which will affect any need-based grants offered by the federal government, state, or your institution) will only be reduced by approximately 5% of your total 529 Plan. With a regular savings account, your reduction could be as high as 20%.
- Your contributions grow at the rate of your investment choice, rather than a bank’s savings account interest rate
The interest rates on savings accounts at your standard brick and mortar banks are abysmal (that’s why you need a HYSA!) But when you save and invest within a 529 Plan, your contributions grow with the power of the stock market! And because this is an investment account, you get to experience the magic of compound interest.
- Your contributions not only grow, but they grow tax free
Because you are contributing money that is taxed, you do not pay taxes upon withdrawal, as long as you’re using the money for qualified expenses.
Qualifying Expenses in a 529 Plan
You could use the 529 Plan to cover anything related to K-12 or pst secondary education. This includes tuition, books, and technology. If a student lives off-campus, rent—determined by the college’s “cost of attendance”—could also be considered a qualifying expense. And as of 2017, your 529 Plan can also be used for K-12 tuition expenses.
Should the beneficiary of the original 529 Plan choose not to go to college, there are a few things that could be done:
- Transfer the 529 Plan to a different, related beneficiary, including yourself
- Keep the account open in case the beneficiary chooses to go to graduate school
- Cash out, but you will have to pay income tax on your earnings.
How to Open a 529 Plan
One of my favorite 529 platforms out is Scholar Raise (affiliate link). While most providers require a minimum, Scholar Raise requires no minimums and no fees. They have simplified the 529 Plan process for you and have even made it so that your entire family can contribute to a child’s 529 Plan, making the path towards generational wealth truly a communal process. As they describe it, imagine a Venmo or Paypal that you would send to your family members, with any sort of payments being sent directly to the 529 Plan.
As a platform that aims to empower people to save for college, the Yo Quiero Dinero platform aligns with the values of Scholar Raise.
Some Final Considerations
As with any investment, the earlier you start investing the better. Personal finance blogger Funancialism likes to say that the best day to start investing was yesterday. This notion is tied to compound interest and letting our money grow in the market for a longer period of time.
Even if your child is still an infant, or you’re only in the planning stages of parenthood, it’s never too early to start saving for college. It is impossible to predict what the cost of an education will be in the future, but if history is any indication, it will continue to sky-rocket.
So what steps will you take to prepare? Comment below if you’ve opened a 529 savings plan.