Going to college is very expensive at the moment. The average American family can’t afford to send their kid to college out of pocket. The costs are far too high.
Tuition alone is an astronomical expense. The National Center for Education Statistics found that the average tuition for public institutions was $9,400 from 2020-2021. The average tuition for a private institution was $37,600 from 2020-2021.
Public versus private isn’t the only factor that will influence college tuition. Students that apply to out-of-state schools will typically pay more than in-state students. Students that take longer than the standard four years to complete their degrees will pay more. If students go on to enroll in Master’s programs or Ph.D. programs, they will certainly pay more.
Tuition isn’t the only expense you’ll need to think of. You will need to consider additional costs like housing while your kid attends college. Paying for an on-campus dorm can range between $8,000-$15,000. Off-campus housing could be more affordable, depending on the location of the college. Students will still face steep rents in New York City, Los Angeles and other metropolitan areas.
In addition to tuition and housing, these are some more expenses that come with the college experience:
- Meal plans
- School supplies
- Student loan repayments
Parents that are worried about managing all of these future expenses should consider opening a 529 plan. Funds in a 529 plan can be put toward education-related expenses like tuition, housing, meal plans, textbooks, school supplies and student loans (up to a limit). Essentially, with the help of this plan, you can lighten the financial burden that college adds to your kids’ shoulders.
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What Is a 529 Plan?
A 529 plan is an investment plan that is specifically designed to collect savings for education-related expenses. While a 529 plan can be used to save up for expenses during the K-12 years, it’s more often used to save up for expenses after high school. Parents and guardians use it to prepare their kids for the rising financial demands that come with attending college.
There are technically two types of 529 plans that you can set up for your kid:
- A prepaid tuition plan
- A college savings plan
Prepaid Tuition Plan
A prepaid tuition plan allows you to purchase units/credits at participating colleges. These units/credits can be put toward tuition and mandatory fees in the future. And the best part? The costs will be based on the current prices for tuition and fees. Since tuition and fees typically increase every single year, your savings would automatically lock in a lower price.
This type of 529 plan will come with more limitations to consider:
- Prepaid plans cannot help costs outside of tuition and mandatory fees (for example, room and board, meal plans and books).
- Beneficiaries will need to attend a participating institution. If they don’t, the investment may not be usable.
- Only a handful of states are accepting new enrollees for this type of plan (Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington).
Education Savings Plan
An education savings plan is a tax-advantaged, investment account where you can store and grow your savings for educational expenses. The funds made through this plan can be used for tuition, room and board, textbooks and more. It can be used for any college or university in the country.
Can You Use a 529 Plan for Other Expenses?
529 plans are not general investment accounts. They’re meant for educational expenses only. Accountholders and beneficiaries that make withdrawals for non-educational expenses will face withdrawal penalties. These withdrawals will also be subjected to income tax.
So, if you’re facing an emergency expense, and you don’t have enough in your savings account to cover it, you shouldn’t look at your 529 plan as a safety net. In fact, making an unqualified withdrawal could cause you more financial trouble.
You’re better off finding an alternative payment method for your emergency expense. You could go to a website like CreditFresh to see whether you’re eligible for a personal line of credit loan. If you’re approved for the personal line of credit loan online, you could request a withdrawal and use the borrowed funds to manage the expense quickly. You could resolve your emergency and then adjust your budget for the repayment plan. This could be a better alternative than facing penalties for your investment plans.
Will It Prevent Financial Aid?
A 529 plan can impact a student’s ability to qualify for certain forms of financial aid, but it won’t prevent them from applying. Several factors will affect their 529 plan’s influence over financial aid, like who is the account holder, how much is in the plan and the size of their family.
Students should still fill out a FAFSA form to find out if they’re eligible for various types of financial aid, including grants and scholarships. It doesn’t hurt to double-check.
A 529 plan could be just the tool you need to get your kids into college — all without taking out a big pile of student loans. Look into this investment as soon as possible.