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Many parents and grandparents in the Cedar Rapids area are worried about how to send the next generation of their family to college. It’s not a secret that college costs have risen over the last few decades. In fact, college tuition has gone up approximately 163% since 1988. Families who want to put their kids and grandkids through college with minimum debt are stuck with a tricky situation – how in the world do they save enough to ensure their future college grad is able to pay for college?

The truth is, you have a few options:

  1. Save cash in a high-yield or traditional savings account.
  2. Understand different loan options available to you.
  3. Invest your savings to grow it more quickly.

Investing in a 529 plan might be one of your options – but it’s wise to know the pros and cons before diving in.

Pro: You Have Options

When you’re hunting for a 529 plan, one of the best parts of the journey is that you have so many different options available to you. You can shop different plans from different states and providers, you often have some ability to select the investments within the plan, and you can usually pick between either a prepaid tuition or a college savings plan.

Shopping Across State Lines

Being able to shop plans in different states opens up your option pool to compare interest rates, investment options, and other tax credits that may be available. You don’t have to be a resident in that one specific state in order to enroll in their 529 plan.

Flexibility With Investment Options

In comparison to other investment vehicles, like your 401(k) or IRA, a 529 plan has somewhat limited investment options. That being said, there is some flexibility, and many plan participants aren’t aware that they have any choices at all. Usually, you can only make two investment changes in a calendar year, but that doesn’t mean it isn’t worthwhile to check in and make adjustments as necessary.

Difference Between Pre-Paid and Savings

There are two different types of 529 plans – pre-paid college plans and college savings accounts. A college savings account can be used toward tuition and education expenses at any school. However, a pre-paid college plan is intended to save money for one specific college. This is great for students who want to attend a particular in-state college and don’t plan to deviate from that plan. Pre-paid college plans often have even more benefits to them, making them more appealing for families who are able to plan ahead.

Pro: Tax-Free Earnings

Your money earns interest and capital gains while it’s invested in your 529 plan. But, unlike many retirement savings plans, your money grows tax-free. In other words, any distributions you take from the account aren’t taxed. This is one of the biggest tax-efficient investment accounts available! Yet, so few families realize that a 529 plan has this many tax benefits, and they don’t maximize their plan savings.

Con: Aid Could Be Reduced

If you have a significant amount saved in your 529 plan, it’s possible that the federal aid you receive could be reduced. However, that’s not necessarily a bad thing. Although federal aid is beneficial, it’s still a form of debt. Having money saved for college beats out having to take out loans to pay for college in the majority of cases. That being said, if you’re concerned about not receiving enough federal aid, it’s wise to speak with a financial planner to evaluate what your family’s best option is based on savings and potential aid.

Con: There Could be Penalties

529 plans sound too good to be true, and (in some cases) they are. They have some serious limitations associated with them. Primarily, you can only use them toward education expenses. If you choose to use them toward anything else, you’ll be hit with some fairly severe penalties (usually around 10%). Additionally, the IRS will tax you on the withdrawals. Because of this, it’s important to understand what’s a qualified expense, and what’s not. For example, transportation to and from college and payments toward student loans are not eligible expenses. However, textbooks and the cost of credits each semester are.

Ask Your Advisor

Are you feeling lost when it comes to saving for college? In times like these, families need to band together to learn more about all of your savings options. A financial planner can help. At Arnold & Mote Wealth Management, we help our clients save for a variety of goals – from retirement to helping the next generation of their family pay their way through college. Ready to get started? Contact us today!