Welcome to Two Minute Money, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important questions involving your money.
Student loan debt in the United States has surpassed $1.4 trillion—and shows no signs of letting up, especially with colleges getting more and more expensive.
You might still be paying off your own loans when it’s time to start saving for your own child’s education.
Feeling anxious? Don’t. You’ve got options. Check out a 529 college savings plan (named after Section 529 of the Internal Revenue Code) which is versatile and offers a lot of tax benefits.
There are two types of 529 plans: pre-paid tuition plans and college saving plans. All 50 states sponsor at least one type of 529 plan. A group of private colleges and universities sponsor a pre-paid plan as well.
A prepaid 529 tuition plan allows you to buy credits at certain colleges at a slightly higher rate than current students pay and cash them in when your child goes to school. The benefit of a prepaid plan is that it locks you into a tuition rate at a time when college costs are rising faster than inflation.
Prepaid plans typically only cover tuition and mandatory fees. That means you’ll have to cover books and room and board on your own.
But there’s a catch: Prepaid tuition plans are slowly going away, with only 10 states still offering them.
Traditional 529 plans
Most states offer traditional 529 plans, which are investment accounts with tax benefits. Plans usually offer several investment options to choose from, and your account will rise and fall based on the performance of the investment.
Most states let you deduct your contributions from your state income taxes, and some states will even match your contributions.
Even better? Earnings on your 529 don’t get taxed as long as you use them for qualified educational expenses.
Like other investment accounts, most 529 plans have fees, but they’re typically only around 1%. Florida is the only state that offers a no-fee option for participants from any state.
You can apply 529 investments to most any school—even community colleges and vocational schools.
The best part about opening a 529 plan is that you don’t have to do it in your own state. You can be a Californian who invests in a Nevada 529 and send a kid to college in New York. Find the one that works best for you.
Three out of four people don’t know what a 529 is … but now you do!
So take action today, and save your child from crippling student loan debt down the road.