By Lynne N. Ward
Executive Director, Utah Educational Savings Plan (UESP)
November 28, 2012
One size doesn’t fit all when it comes to saving for college. Your family has unique needs, means, and goals, and your family needs a unique college savings blueprint.
Fortunately, you have lots of options, especially among 529 plans. Two of those options are 529 Prepaid Tuition Plans and 529 College Savings Plans.
The type of plan that best fits a beneficiary’s needs differs from family to family. Keep reading to learn more about the benefits each has to offer and why for some savers, the choice may not have to be one or the other.
While both Prepaid Tuition Plans and College Savings Plans are tax-advantaged savings vehicles designed to help families save for a beneficiary’s future higher education expenses, each works a little differently. In short:
Prepaid Tuition Plans allow you to purchase tuition “units” or “credits” at a fixed price today and swap them for higher-priced units or credits in the future, the anticipation being that tuition costs will continue to rise. (Betty Lochner, Director of Guaranteed Education Tuition, recently educated CSPN blog readers about Prepaid Tuition Plans.)
College Savings Plans allow you to invest funds in investment options that range from conservative to aggressive, the anticipation being that funds will increase over time.
Thanks to their differences, the two types of plans can nicely complement one another in a college savings portfolio. Following are a few ways you might benefit from a combination of both.
Qualified Expenses
As indicated by their name, Prepaid Tuition Plans focus on preparing families for future tuition costs. However, Prepaid Tuition Plans vary in what additional higher education expenses they deem eligible for tax-free withdrawal.
Funds saved with a College Savings Plan can be withdrawn tax free when used at an eligible institution (as defined in the next section) for a qualified beneficiary’s:
Required books, supplies, and equipment; and Certain room and board costs, if the beneficiary is enrolled at least half-time.
If a specific Prepaid Tuition Plan does not cover one or more of the expenses listed above, a College Savings Plan can help make up the difference.
Eligible Institutions
Some Prepaid Tuition Plans require a beneficiary to be an in-state resident or to use their units and credits at an in-state institution. Other plans will apply purchased units or credits to expenses at out-of-state schools, at times with discounted conversion rates and limited backing.
College Savings Plans consider an eligible institution to be a college, university, or technical school in the United States or abroad that participates in federal financial aid programs for students. (See a complete list of eligible institutions at fafsa.ed.gov.)
A College Savings Plan can be a nice backup if a beneficiary enrolled in a Prepaid Tuition Plan will be affected by moving out of state or electing to attend or later transfer to an out-of-state school.
Timing
Students change majors, declare double majors, and retake classes. Some spend longer than expected earning that diploma. And some new graduates make a last-minute decision to enroll in graduate school.
If a Prepaid Tuition Plan is designed for undergraduate expenses only, or requires funds to be used within a specified number of semesters or years, a College Savings Plan can help fill in the gaps. This holiday season is a great time to start building a custom-made college savings strategy for you and your family today. Here at the CSPN website is a great place to begin. It’ll be a gift you won’t have to return!
The program offerings of each 529 plan differ and should be considered individually. Determine whether the state in which you or your beneficiary pay taxes or live offers a 529 plan that provides state tax or other benefits.
About the Author
Lynne N. Ward, CPA, is the Executive Director of the Utah Educational Savings Plan (UESP), a nonprofit, direct-sold, tax-advantaged 529 college savings program. As of October 2012, UESP holds $4.9 billion in college savings in more than 200,000 accounts for diploma-bound beneficiaries across the country. Ward serves as Treasurer on the College Savings Plans Network (CSPN) Executive Board. To learn more about UESP, visit www.uesp.org or call toll-free at 800.418.2551.