Many parents find investing in 529 plans as a feasible and beneficial method for saving money for college. The plans come in two distinct types — investment savings and college prepaid options. The features differ greatly within the two plans. Although both options are great ways to save for money for education costs, they also come with distinct advantages and disadvantages. Understanding the features of both types of 529 plans can help you choose the right one for your personal financial situation.
Most prepaid 529 plans are backed by the issuing state. This feature is beneficial to students who plan to attend college in their home state. Some states offer tax deductions or tax credits if you invest in a state-sponsored 529 plan. The investment value of a 529 college savings plan is not backed by the state, but the plan does not have residency requirements in order to invest in it. You should pick a college savings plan if your child desires to attend an out-of-state college.
The returns on a prepaid plan are typically less than the rate of return on a college savings plan. You are in total control of the investments held within a college savings plan. You decide how you want to divide your money between stocks and bonds. Some states make investment decisions easier by offering an age-based fund, which uses the beneficiary’s age to decide how to allocate assets. If you are not comfortable choosing assets or do not have the time required, a prepaid plan might better serve you.
Costs You Want to Cover
If you want to control how much you pay for college expenses, you should pick a prepaid plan. It locks in the cost of college tuition and fees by allowing you to pay for a year of college tuition ahead of time. Compared with the college savings plan, the education costs covered by the prepaid plan are somewhat limited. In most cases, you can use a prepaid plan to pay for only tuition and fees. A college savings plan does not lock in a tuition price, but you can cover more expenses. Qualified expenses include tuition, fees, books, supplies, room and board and equipment.
The investment flexibility of a college savings plan also comes with higher fees. Associated fees include enrollment, asset management and yearly maintenance fees. The asset management fees depend on the investment you choose for your plan. College savings plans sold though financial brokers might also include load fees. The typical fees associated with a prepaid plan include enrollment and administrative fees. If fees are something that greatly concerns you, a prepaid 529 plan might provide a greater benefit.