Financial aid guide for students and parents

For a parent, the birth of their child is one of the happiest and treasured moments of their life yet this happiness comes with enormous responsibilities. Out of these responsibilities, a critical responsibility is planning for the child’s education. Most parents start planning and saving for their child’s education right from child’s birth. With increasing cost of education, mere planning is not enough as one should also analyze how much to save, what will junior college cost when the child turns 18 and what are the various ways in which financial planning for college can be done. One of the popular ways to save money for education of one’s child is through the use of 529 plans.

529 Plan is an investment vehicle designed by the U.S. government to encourage families to save for the college education of their children. This plan, initiated in 1996, has derived its name after Section 529 of U.S. Internal Revenue Code and is authorized by them. These plans are also called Qualified Tuition Programs (QTP) and are sponsored by educational institutions, states or state agencies. These plans help families set funds aside for college expenses and can only be used for educational expenses. Tax benefits associated with these plans make them even more attractive for families.

These state sponsored plans are an ideal option for college savings and can be further classified as –

• 529 College Saving Plans – These are state-managed, tax exempt investment vehicles with a low emphasis on eligibility of need-based financial aid. They enable an account holder (college saver) to start an account for the purpose of paying the college expenses of a student or beneficiary. They operate just like stock market accounts and are usually in the form of mutual funds. The money can be used to pay for tuition, fees, books, board, supplies, room and other expenses and can be paid at any college. Though these plans cover all ‘qualified expenses’ and offer a range of risk-based asset allocation portfolios, they do not offer lock in rates and guarantee.

• 529 Prepaid Tuition Plans – These plans allow college saver to buy credits or units for future fees at participating colleges or universities. Sometimes, a person can also purchase units for board and room. Thus, one can purchase or lock in the child’s future education at present rates with a guarantee to cover the expenses when the child attends college. But most of these plans have a limited period of enrollment and a grade/age limit.

529 plans are simple plans with tremendous benefits like –

• There are no taxes to be paid on the earnings of these accounts.

• The control of account is with the account holder not the beneficiary (student), thus one can roll over the account to another family member if the beneficiary does not want to go to college.

• It is not necessary that only parents can be account holders, any person can contribute to these accounts.

• Every state in U.S. (including Washington D.C) offers atleast one 529 plan and there are some private colleges and institutions that offer Independent 529 plans.

• In case that child also gets a scholarship, the unused amount can be withdrawn by paying the taxes and without any penalty.

• In most of the states there is no age limit for usage of money in the account.

• There are no limitations or criteria related to the individual’s income, thus no one can be considered ‘ineligible’ for an account.

Investing in a 529 plan is a wise choice to ensure an affordable college education for one’s child and is one of the best gifts that parents can give their children.