10 Things Parents Should Know About College Savings

Image of Little boy and father with savings

70% of jobs will require a college degree. With the rising costs of tuition and debt, it’s important to start saving early so students can focus on their studies instead of worrying about student loan debt after graduation.

Whether your kids are in high school or you’re an expectant new parent, it’s never too late to start saving for your children’s college education. While there are many ways you can save, 529 plans may be the most advantageous option. 

A 529 college savings plan is a state-sponsored investment account that helps families save for higher education expenses. Savings in the accounts can grow tax free and withdrawals are tax free when used toward qualified educational expenses.

529 Plans Grow Tax Free

The money you put into a 529 savings plan will grow tax-deferred and withdrawals are tax-free, as long as the funds are used strictly to pay for qualified education expenses. Funds may also be used towards tuition for eligible K-12 schools or towards student loan debt. These tax breaks are a huge advantage.

Many States have 529 Tax Deductions for Contributions

Over 30 states currently offer a state income tax deduction or tax credit for 529 plan contributions. Maximum contribution to 529 college savings plan are limited, with caps varying by state. These can be anywhere from around $235,000 to $529,000, so check your state’s 529 plan guidelines if you’re unsure. Annually, though, you can contribute as much as you want as long as you don’t exceed your state’s cap.

Many states also enforce initial, lump-sum, and additional contribution minimums. These are usually somewhere around $25 or $50 but how much you must pay and how often depends in part on the investment accounts in your 529 plan.

Funds can be used for more than just a four year college education

The money in a 529 college savings plan isn’t just for college.

Beneficiaries have the option of using the money for vocational school, K-12 private school expenses, student loan debt, and many other qualifying educational expenses.

And if you do use the funds in your 529 account exclusively to pay for college, the funds can be used to cover a multitude of expenses: tuition, room and board, books, lab fees, and more.

529 Plans can be used at schools nationwide

529 Plans can be used at accredited two and four year colleges, vocational schools, institutions of higher learning, including many outside the U.S., as well as certified apprenticeships. Up to $10k per year is available for tuition costs for private or public elementary and secondary schools.

You won’t lose your money if you child doesn’t use it

If your child ends up not pursing college there are other ways to take advantage of a 529 Plan. The account can be used for other types of education besides college, including trade and vocational schools and more. The beneficiary can be changed to another member of the immediate or extended family: parents, siblings, nieces, nephews, or first cousins are eligible recipients.

If you decide to use the money for something other than qualified education expenses, you will have to pay income taxes plus a 10% penalty on the earnings.

Keep in mind that every path to college (or post-secondary learning) is different. For some kids, college is a 4-year rite of passage that takes place immediately after high school graduation. For others, they might not be fully college-ready until they’re in their late 20’s or older. Not every path is straightforward and traditional. Whether your child is 19 or 39, they can use funds in their 529 plan for college or other post-high school learning when they’re ready.

$18,648 is how much more you’ll save (or earn) for college *

Just start with adding $100 a month into a 529 Plan and you can save substantially more than a traditional savings account. Save even more with cash back programs like Upromise.

529 plans are eligible to be linked to the free Upromise Rewards program. Across the country, Upromise has helped families save over $1 Billion for college. Join free and earn cash rebates and other free cash rewards to save for college and your child’s 529 plan. Additionally, every month 5 Upromise members win a $529 scholarship.

*This assumes a 6% hypothetical rate of return for 529 plans compounded annually and assumes a 0.05% APY or annual interest rate for a savings account. The information in the infographic chart is for illustrative purposes. Funds invested in a 529 plan may see higher or lower rates of return than illustrated in this example.

Check out these College Savings: 529 Plan Basics by State