Gone are the days that you could support three years at college by working part-time at the supermarket. Tuition costs have become prohibitive enough over the years, and that’s without living costs piled on top. So nowadays, saving properly for college is more important than ever. That doesn’t make it easy though. There’s any number of different places to put your money, all with different rates, requirements, and bonuses, and it can be hard to figure out which one is right for you. Yet setting up a college savings account need not be such a daunting prospect, provided you have the necessary understanding at hand.
What exactly is a college savings account
There are several ways to save for college. People may choose to utilize UGMA or UTMA accounts, which allow for gifts and transfers to a minor to be used how they see fit, but usually for education. Some people also just use a regular savings account. However, a college savings account, or 529 plan, has benefits as an account geared toward college saving, that other options don’t have. A 529 account, so named for the relevant section of the Internal Revenue Code, is a savings account designed specifically for college that can be paid into with before-tax dollars, and is free from tax regarding the interest that the money accrues.
There are different kinds of 529 plans. A prepaid plan involves paying to buy a certain amount of tuition credits at the current day’s rate. The benefit of a prepaid 529 plan is that it’s less volatile. You pay a set amount for a set amount of credits, to be cashed in when the attendee begins college. You’re not going to suddenly lose half your money on a bad day at the market. However, something very similar could still happen depending on how tuition fees change. Because you buy credits for a fixed amount, if tuition fees should rise, the money you paid will buy you fewer credits. In addition, a prepaid plan can only pay for tuition, not for room and board.
A savings 529 plan is based upon investment. The account holder may choose different investments to purchase, which will theoretically accrue in value over time. A benefit of this kind of plan is that the money you earn isn’t fixed, but can grow, sometimes beyond expectations in a particularly good year. In addition, it can be used to pay for room and board as well as tuition.
The main drawback to a savings plan is that it’s much more volatile. The risk of the shares can be organized, and savings plans tend to involve options that get less risky over time. However, you are still at the whims of the market. If what you put your investments doesn’t move you won’t earn much, and should it take a dive you might end up with fewer savings than when you started.
All in all, a 529 plan can provide exactly the kind of savings arrangement you need, provided you can pick one that meets your needs. The only downside to a 529 plan is that, should whoever the account was set up for decide they don’t want to go to college, you will have to pay a penalty to take the money from the account. Otherwise, a 529 plan is an excellent way of gearing your savings towards college, and making sure your soon-to-be student can get the best education possible without emptying your pockets.