A 529 plan is the most common type of college trust fund. Parents are given two options when setting up a 529 plan – a prepaid tuition or a savings plan. Parents or guardians may set up a college trust fund with their state’s college savings program. Understanding the features, fees and rules surrounding 529 plans can help you make informed decisions regarding setting up the appropriate fund.
Prepaid Tuition Plan
A 529 prepaid tuition plan allows you to prepay tuition, locking in the current price of tuition. The plan covers only tuition and mandatory fees. Most prepaid tuition plans are sponsored by state governments. In most states, students must meet residency requirements to qualify for the plan. The investments in prepaid tuition plans are held safe until the beneficiary or account holder withdraws the money for educational expenses.
Pros and Cons of Prepaid Plans
A primary benefit of a prepaid tuition plan is that you do not need to worry about rising tuition cost because it locks in the current tuition price. Another advantage of setting up a prepaid plan is that you don't need to make investment decisions. This is especially advantageous for people who are inexperienced in choosing investments. A disadvantage of setting up a prepaid tuition plan is that it does not cover related college expenses, such as room and board and books. Also, prepaid tuition plans may not cover all out-of-state private school tuition costs.
College Savings Plans
When a parent or guardian establishes a college savings plan, the account holder selects several underlying investments for the plan. Investment options may include money market funds, stock mutual funds and bond mutual funds. Account holders may also set up an option that allows the plan to shift to more conservative investment options as the beneficiary nears the time to attend college. The investments in a college savings plan are not guaranteed by the state or federal government, and the plan can lose value if the value of the investments decline.
Pros and Cons of Savings Plans
A benefit of establishing a college savings plan is that it covers a student’s tuition, fees, books, room and board and other college-related expenses. A college savings plan has no residency requirement, so the student may use the money to attend any school. According to the Securities and Exchange Commission, some non-residents may only set up a college savings plan through financial advisers or brokers. Parents and guardians desiring for their children to attend out-of-state schools should check their state’s rules. A disadvantage of the plan is that tuition prices are not locked. If tuition costs rise rapidly, you may not save enough money in your plan. Another disadvantage to savings plans is that they are tied to the securities markets. Economic factors can affect the value of the college trust.
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