Hot Topics in Higher Education
Saving for College: 529 Plans
Hot Topics in Higher Education
This brief is part of the series, "Hot Topics in Higher Education," written for state policymakers. NCSL gratefully acknowledges Lumina Foundation for its financial support of this work. The other briefs in the series are:
NCSL Education Program
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Now more than ever, people need a college degree to obtain stable, well-paying jobs. At the same time, however, college continues to become more expensive. 529 plans provide a way for families to save money for college now and be better positioned to afford higher education in the future.
A 529 plan is a tax-advantaged investment plan designed to encourage families to save for future college expenses. The plans, named after Section 529 of the Internal Revenue Code, are operated by states, private sector partners and educational institutions. The two different types of 529 plans are prepaid tuition plans and college savings plans. Under both plans, funds grow income-tax free and, when withdrawn, are exempt from federal income taxes if used for qualifying higher education expenses. If withdrawn funds are not used for higher education, they are subject to federal income taxes plus a 10 percent penalty.
Prepaid tuition plans allow families to buy tuition credits at today’s price to be used in the future. Since tuition prices are continually rising, prepaid tuition plans can be a good deal. The downside is that the plans offer little flexibility. Most state-operated plans require the funds to be used at instate public institutions. As an alternative, a consortium of private colleges offers a prepaid tuition plan. In either case, parents must predict where their child will want to attend college—and the student will need to be accepted at that institution.
The 529 college savings plans, which function similarly to 401(k) plans, are a better option for families that want more flexibility. Families have a variety of investment options with the college savings plans, and the funds can be used at any college. Families are encouraged to invest aggressively early in the plan, then switch to conservative investments as the date of college enrollment approaches.
In This Brief
Download the brief to learn more about:
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State Income Tax Benefits
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Risks of 529 College Savings Plans
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Risks of 529 Prepaid Tuition Plans
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State Matching Grant Programs
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Legislative Action on 529s