StateStats: Safeguarding Against College Costs: September 2012 | STATE LEGISLATURES MAGAZINE

A college degree is vital to obtaining a stable, well-paying job, yet college costs continue to escalate. A public, four-year college in 2011-2012 cost an average of $11,380 for tuition, room and board. To help parents save now for their children’s future college educations, state lawmakers in 49 states and the District of Columbia have authorized 529 plans (named after Section 529 of the Internal Revenue Code, which created them in 1996). These plans are operated by states, in conjunction with private sector partners or educational institutions.

There are two different types of 529 plans:  prepaid tuition and college savings. A prepaid plan allows parents to buy tuition credits at today’s rate for future college expenses. The savings plans function like 401(k) retirement plans; the earnings are tax free and when withdrawn, exempt from federal income taxes if used for college.

A wide range of actions is available to legislators concerning 529 plans, in addition to creating them in the first place. Legislators can provide oversight of the plans, and they may choose to design matching grant programs that provide incentives to save for college.

Lawmakers in 34 states offer state tax breaks for 529 plans as well. Eight states offer both types of 529 plans, 40 states offer only a savings plan, and one offers only a prepaid tuition plan.  

—Brenda Bautsch and Michelle Camacho Liu