When you have a child, saving for college can be overwhelming. Besides finding the money to set aside each month, you also have to learn all the terminology to help your child to go to school. From FAFSA deadlines to Pell Grants, there’s a lot to keep in mind.
One of the biggest challenges is deciding what kind of 529 college savings plan to use. While most people have heard of the traditional 529 plan, there are actually two types of 529 plans available. Your other option is a prepaid 529 plan, which many may not be familiar with.
Below, find out more about what each 529 plan offers.
What is a traditional 529 plan?
529 plans are offered either by the state you live in or by an educational institution. You can use 529 plans to save money for a child’s college education. You choose your investment strategy and over time, the account (hopefully) grows. With regular contributions and annual returns, you can use the 529 to fund your child’s tuition and other costs.
The government and IRS incentivize you to invest in a 529 by offering you tax advantages when you set aside money for your child’s college education.
Though contributions are not tax deductible, if the money in the 529 grows, any earnings are not subject to federal tax. As long as the beneficiary uses them for approved education expenses like tuition or books, the withdrawals are not taxed.
As of 2010, students can even use 529 dollars to buy a new computer and software to use for school.
Anyone can set up a 529 for a student, even if you are not the parent or guardian of the child. The only requirement is that you must be a U.S. citizen or resident alien and be at least 18 years old. But there are contribution limits; the amount in the 529 cannot exceed the cost of the child’s education expenses.
A child can have multiple accounts set up in their name. If a grandparent, aunt, and family friend all decide they want to open a 529 for the kid, they can all do so and have the child as the beneficiary of multiple accounts.
What is a prepaid 529 plan?
With a prepaid 529 plan, you can lock in today’s tuition prices at in-state public schools for your child, even if he or she will not be attending college for 10 or 15 more years. With a prepaid plan, the state guarantees the value.
For example, let’s say you purchase a semester for a public college in Florida. Today, a semester for in-state students at the University of Florida costs $6,380. In 15 years, when your child is ready to go to school, a semester at the same university may cost triple what it does today.
But because you already paid for the semester with a prepaid 529, you locked in the original price of $6,380, potentially saving thousands of dollars per semester.
Prepaid 529 plans are simpler than traditional plans and offer peace of mind, as there’s no risk of losing your principal investment. However, your child’s options are more limited. Depending on where you live, you might only get a small return on the original investment if your child decides to go to a private school or out-of-state institution.
However, if your child decides to attend another school or not attend college at all, you can transfer the prepaid 529 to another beneficiary.
When does it make sense to opt for a prepaid plan?
Whenever you invest, there is always a measure of risk. With a traditional 529 plan, your money will ebb and flow with the stock market. As your child gets closer to needing the money to pay for school, watching the stock market’s rise and fall can get increasingly stressful and cause you to become more conservative with your investing.
A prepaid 529 can be a safer option, though it does have some risk, too. It can be a good option if you are reasonably certain your child will be comfortable attending an in-state public university. If that’s the case, a prepaid 529 can be a great investment option, helping you buy tuition at today’s prices and hedge off future tuition increases.
With a prepaid 529, your investment is secure. It is not part of the stock market, so your principal investment is not affected by any market changes. As long as your child attends a college within the state, you can use your money as you intended.
Saving for college
Saving for college can be challenging, but you can do so successfully if you start early and contribute regularly. By doing your research ahead of time and choosing your investment vehicles wisely, you can rest easy about your child’s education.
For more information on how to help with your children’s education, learn how to pay for college without ruining your own finances.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.47% APR (with Auto Pay) to 7.59% APR (with Auto Pay). Variable rate loan rates range from 2.27% APR (with Auto Pay) to 6.89% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of August 15, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/15/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.37% effective July 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.27% – 6.89%1||Undergrad & Graduate|
|2.27% – 7.75%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.24% – 6.67%4||Undergrad & Graduate|
|2.37% – 7.95%5||Undergrad & Graduate|
|2.46% – 9.24%6||Undergrad & Graduate|