College Savings FAQ's

What is a 529 plan?

A 529 plan, named for a section of the federal tax code, allows you to save for college in a tax-deferred investment. Your withdrawals are tax-free when used for tuition, room and board, and other qualified higher education expenses.

There are two types of 529 plans: college savings plans and prepaid college tuition plans. They differ in who chooses the investments and who assumes the risks.

A college savings plan operates like a 401((k) retirement plan. You pick your investments and shoulder all of the investment risks. When it’s time for college, you have whatever money is in your account.

A prepaid college tuition plan operates more like a traditional pension. The funds you invest generally keep pace with increases in a state’s resident undergraduate tuition. The state picks the investments and assumes all the investment risks.

Most states now have either a college savings plan or a prepaid college tuition plan. Some states have both. Both types of plans now receive favorable treatment for financial aid purposes. They’re considered assets of the account owner (generally the parent), which minimizes their impact on need-based financial aid.

What expenses may be paid from 529 accounts?

Amounts in 529 plans may be spent on “qualified higher education expenses.” These include tuition, room and board, books and fees and any other expenses that students are required to pay to attend the college or university. States may further restrict the uses.

What are the benefits of a college savings plan?

College savings plans offer a wide range of benefits - these plans allow students of all ages to save for college costs. Here are some ways in which the college savings plans differ from prepaid tuition plans:

• College savings plans do not lock in college costs; they simply provide you with a savings vehicle to use specifically for educational expenses.
• Covered education expenses include: tuition, mandatory fees, room and board, books, and equipment, such as computers.
• Many plans have contribution limits in excess of $200,000.
• The plans do not have a guaranteed profit and are subject to ups and downs of the market.
• College savings plans are open to children and adults.
• There are no residency requirements so you can purchase a plan from a state where you are not a resident.
• You can enroll in a college savings plan year-round.

What are the benefits of a prepaid tuition plan?

Prepaid tuition plans offer a wide range of benefits, including no risk to principal, a better rate of return than bank savings accounts and CDs, and they are often guaranteed by the state. The ways Prepaid Tuition Plans differ from College Savings Plans include:

• Prepaid tuition plans lock in tuition prices at eligible public and private colleges and universities.
• Covered education expenses include tuition and mandatory fees only. Some plans offer an option to include room and board or other qualified expenses.
• Prepaid tuition plans establish contribution limits by setting up a contract to pay for tuition at a two-year community college, four-year undergraduate program, or a combination of the two. Some plans also include an option for graduate school.
• Many states guarantee or back their plans.
• Many prepaid tuition plans have age or grade limit requirements for beneficiaries to enroll.
• Most state plans require that either the owner or the beneficiary have residency in the state where the account is held.
• Most plans have a limited enrollment period.

While each educational institution may treat assets held in a 529 plan differently, investing in a 529 plan will generally reduce a student’s eligibility to participate in need-based financial aid. Beginning July 1, 2006, assets held in pre-paid tuition plans and college savings plans will be treated similarly for federal financial aid purposes. Both will be treated as parental assets in the calculation of the expected family contribution toward college costs. Previously, benefits from pre-paid tuition plans were not treated as parental assets and typically reduced need-based financial aid on a dollar for dollar basis, while assets held in college savings plans received more favorable financial aid treatment.