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College savings with the 529 plan
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Spring brings high school graduations, and every parent feels the pride of the high school graduate in the family moving on to adulthood and hopefully making plans for a next level of education.

In many ways, today is a little late to be formulating a plan to pay for college for most families.

Maybe the HOPE scholarship, begun in the early 1990s, has built a false sense of security about college and possibly the economy has prevented some families from facing the costs of higher education. Also, with all of the pressures of adults having to plan for their own retirement, it is not surprising that the potential cost of college may not rise to the top of concerns.

But even when HOPE paid 100 percent of tuition and most fees, those savings only approximated a part of the total cost of college considering room and board, food and other costs. Now, of course, even with HOPE paying 82-85 percent of tuition, there is an even larger gap, about half of the total cost with all fees the responsibility of the student’s family as well as the other costs mentioned.

Georgia’s average student debt total is some 16 percent less than the national average, maybe because of HOPE and because of the state’s average tuition being lower than the average for many states. So, there are positives about seeking a degree in Georgia for Georgia citizens.

But tuition has increased substantially over the past few years and a steady increase is almost certain over time. One key to keeping down student debt is a regular college savings account begun years before college age.

Georgia’s Path2College plan makes saving for college easier

For families willing to start planning for college earlier rather than later, Georgia’s 529 plan makes a lot of sense. But what are 529 plans?

To encourage Americans to save for college in advance, the Congress added section 529 in 1996 to the Internal Revenue Code. The addition authorized the state qualified tuition savings programs (now known as 529 plans) that were already being utilized by families throughout the country.

Essentially, 529 plans are a state-sponsored investment and savings vehicle to encourage premeditated savings for college by offering incentives that include tax benefits, low program fees, and low-risk investment plans. Currently, every state offers a 529 plan to their residents and residents can invest in other state plans.

The 529 college savings plans are available in two forms: prepaid tuition plans and college savings plans. In prepaid tuition plans, participants buy tuition credits or certificates on behalf of the designated beneficiary, who can then use them for qualified higher education expenses. These expenses include tuition, fees, books, supplies, and room and board (if enrolled at least half-time).

The more popular college saving plan allows for contributions to an account for the purpose of paying designated beneficiary’s higher education expenses. This is the form of Georgia’s plan.

In college savings plans, individuals purchase interests or shares in a trust established by the state. These plans may offer a number of investment options, which often include stock mutual funds, bond mutual funds, and money market funds. As expected, these investment options vary in risk and return for an individual. For those familiar with investing, this may sound similar to the mutual funds model.

Contributions to 529 plans are made with after-tax dollars and are not deductible for federal tax purposes, but the earnings on the contributions to the plan are tax-exempt as long as they are used to pay for qualified education expenses. Also, earnings included in the withdrawals from the plan for qualified higher education expenses are not taxed. Anyone wishing to create a 529 account can do so in any state, regardless of that person’s residency.

However, some states (including Georgia) offer additional tax benefits for state residents investing in the corresponding state plan. Georgia’s 529 plan, Path2College, is an authority operated under the Georgia Office of the State Treasurer and provides a painless way to save for a child’s or grandchild’s college.

Next week: More about Georgia’s 529 plan.

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