The 529 plan and you

How can you keep from getting into massive college debt? What benefits are there to saving now for future education, and what benefits does the 529 plan have for you?

College debt has increased steadily for the past 15 years. In fact, the average debt per borrower has gone from about $10,000 in 1993 to just over $35,000 in 2015. This increase is projected to continue. This could be a challenge for the next generation looking to seek higher education or those today looking to save money for their children’s future education.

It doesn’t help that colleges are hiking their tuition rates well above the rate of inflation. Also adding to the debt drain is many graduates today are not earning the higher wages expected upon graduation. The gap between earnings and debt is widening and making it harder to pay off college loans, credit cards or make car payments. But there is a way to not fall prey to high payments and this burdening debt. Enter the 529 plan.

These “qualified tuition plans” offer a way for tax savings and a possible lock on those rising tuition costs. There are two types of plans offered by the government and most states. All states have at least one and possibly individual private plan offerings. This financial tool may keep the weight of debt off the backs of future generations. Here are some highlights of the pre-paid tuition plan and the college savings plan.

The pre-paid tuition plan allows the saver to purchase units or credits at an institution at the current tuition rate. Some universities or institutions will allow you to lock in today’s price. In turn, they issue out payments for tuition and mandatory fees when the child or adult attends the institution. However, these plans might not cover all expenses, like room and board. Check with your individual state plan on the specifics. There may also be an age limit for the beneficiary. However, most plans allow you to transfer that money to another beneficiary if the future student is unable to attend or gains a scholarship. It also allows for others outside the immediate family to contribute to the plan.

In a college savings plan, there is no lock on college costs, but it does cover all “qualified higher education expenses” like tuition, room and board, books and computers. In this plan, you can invest in the market for greater growth and return on the investment. You are taking the risk with the market, but there is potential for greater earnings and those earnings are not taxed. In addition, as you contribute you can set your investment to be more conservative as the beneficiary reaches college age. This plan also has no residency requirement or no age limit.

For Michiganders, the Michigan Education Saving Program is very accommodating. It is easy and convenient to set up, there are tax advantages and the money can be used for more than tuition; room and board, fees and computers are included. It can also be used at any accredited university and vocational school nationwide or abroad. Anyone can help contribute to the plan and any unused funds can be transferred to another child-niece, nephew, cousin or grandchild. The tax savings can be beneficial too, but you will need to look for fees and “loads” attached to some of the plans. Please review each plan and find out what is best for you.

Is it the right time to start saving for college? That is what you will need to determine. You may be in debt yourself right now or need to pay off loans, credit cards or mortgages. However, if the time is financially right, you may want to take advantage of a 529 plan. This can be a win-win for you (saving on costs and taxes) and your child (less debt once they graduate college) to make future education a possibility and not a problem. The time to start is now; get yourself educated on the 529 plan.

For more information on fiscal management or youth money management, please visit Michigan State University Extension and the Michigan 4-H Youth Development websites.

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