Student loan debt is unarguably one of the fastest growing deficits today. With amounts exceeding one trillion dollars (and growing every second), student loan debt nearly doubles our nation’s credit card and auto loans debt. It’s no surprise that people are faced with anxiety when determining how, when and what to put away for their kids’ educations. Many vehicles are available for college savings including Coverdell ESAs, ROTH contributions and savings bonds. However, the most recognized plan on the market today are 529 plans.
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions. There are many attractive features of 529 plans including:
- Tax-deferred and tax-free savings.
- Depending on state laws, there may be additional tax incentives available.
- Preferred financial aid (FAFSA) treatment.
- Inexpensive, simple and does not expire.
The new tax reform provides additional benefits of 529 plans:
- Broadening the definition of “Qualifying Schools” to include private and religious K-12 schools (limited to $10,000 toward tuition expenses only).
- The capability to roll 529 funds into an ABLE account.
So, we have established the benefits of 529 plans. Now the question is: how does one choose a plan? Unfortunately, the performance of a 529 plan cannot be accurately predicted. Therefore, deciding factors are weighted heavier on taxes, price and the investment selection available. A large misconception is that you need to purchase a 529 plan that is specific to your home state. This is not true. You do not need to use your state’s 529 plan and your choice of a 529 plan also has no affect on where your child attends college.
A couple resources to help with the 529 search are Morningstar and Savingforcollege.com. Morningstar uses a Gold, Silver and Bronze scale to evaluate the pros and cons of 62 popular plans. They use “five pillars” to determine the rating (Process, People, Parent, Performance and Price). For more information on the Morningstar 529 visit www.morningstar.com.
A second resource is Savingforcollege.com. Like Morningstar, Savingforcollege.com also uses a scale to rate various 529 plans. Instead of the Gold, Silver and Bronze scale, a “Graduation Cap” scale is used. Each plan is rated based on their Performance, Costs, Features and Reliability and given anywhere between one and five “Graduation Caps.” For more information, visit www.savingforcollege.com.
As with any major life decision, it is very important to consult with a professional prior to making a final decision. Adam Shay CPA PLLC can refer clients to a financial advisor that specialize in choosing and setting up a college savings plan that will work for you and your family.