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To avoid excess student loan debt, it’s important to prepare for college expenses. A 529 plan is a tax-advantaged college savings plan, and a great option for families to save for their child’s education well in advance. Named after Section 529 of the Internal Revenue Code, 529 plans are run by state & educational institutions, allowing parents to save funds tax-free.
There are two types of 529 plans: prepaid tuition plans and savings plans.
Prepaid Tuition Plans: Prepaid tuition lets a saver purchase credits at participating colleges for future tuition. Usually, public and in-state schools participate in this plan. Account holders can buy fees at current prices for their child or beneficiary. However, these fees do not cover costs for future room and board. Check if your state government guarantees the money paid in the event of a financial shortcoming.
College Savings Plans: College savings plans let account holders open an investment account to save for future education costs. These plans are generally covered at most colleges and universities. Tuition, fees, AND room and board are covered expenses. College savers can choose a variety of investment options. Choosing what type of funds to invest in is up to the saver.
While 529 plans allow tax-free college savings, there are associated fees. Enrollment/application fees, maintenance fees, broker fees, etc. may apply.
529 plans also come with restrictions. Investments and withdrawals are monitored with limitations to allow accounts to grow.