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How a 529 Plan can help students pay for college

You may have heard the term 529 plan in a radio ad or at a counselor’s office, but have you wondered what it is?

At its simplest, a 529 is a savings account. But it is an account that is specifically geared to help save money for college. Anyone can set it up, either for themselves or for relatives like a child or grandchild. And what sets it apart from a regular savings account is that the money is not subjected to state tax when it’s used for qualified education expenses. That includes college tuition, fees, textbooks, and room and board. The money can be used at any school that is eligible for financial aid.

There are two types of 529 plans: prepaid and savings

The Prepaid plan is pretty much how it sounds. It allows a student to pay for tuition credits at today’s cost but use them in the future. Essentially, you lock in the price of tuition and avoid paying more later. They are managed by either the state government or the school. Right now, Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington State all have 529 plans that people can join now.

The Savings plan is more like a 401(k). The value comes from investment performance, usually mutual funds. You can use 529s outside the state they’re administered.

Now, there are some limits to a 529. First, a 529 is usually included as an asset on the FAFSA. If you’re a dependent with a 529 or your parent has one, it will be counted as a parental asset on the form. If no one claims you as a dependent and you have a plan, it will be a student asset. Both can affect the amount of aid you’re eligible for. If your grandparents or an aunt own the plan, even if you’re the beneficiary, it won’t be counted as an asset. It can, however, be considered as untaxed income.

State taxes are avoided only if it’s spent on your education. So you can use it to buy the laptop you use to take notes, research, and write papers on. It can’t be used for the game system in your dorm room. And it could still be taxed by the federal government.

The 529 is a long-term plan for college. It can be a big help in paying for college, but you still need to consider all options. Talk with a financial aid officer and look into all the possibilities.

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Tom Wray

Tom Wray is all about the research, getting it right, and making it relevant. He’s got solid journalistic experience in all forms of content delivery – and he’s got his keyboard humming with what’s up and important for students, college admins, parents, employers and news junkies. Check out his weekly columns: Student Loans 101, News Flash!, Eye On School Success, Eye On Student Success and more. Follow him on Twitter at @Tom_Ceannate.