New Flexibility for College Savings

The steady rise in the cost of a college education has slowed somewhat during the past two years. At public four-year schools, the average inflation-adjusted cost of tuition, fees, room, and board increased just 1.2% in the 2013–14 academic year and 1.0% in 2014–15. At private schools, the increases were 1.8% and 1.6%, respectively.¹

That’s good news for families with current or future students. But even so, college is expensive, and the long-term trend suggests that costs may rise at a faster pace in the future (see chart).

Despite the cost, higher education is a valuable investment. College graduates not only earn more than non-graduates but tend to be healthier, more satisfied with their jobs, and more likely to remain employed during tough economic times.²A strategic savings plan could be a key step toward providing your student with the many benefits of a college diploma.

Section 529 Plans
A Section 529 plan is a state- or college-sponsored program designed to help families accumulate savings for future higher-education costs. These plans have been available since 1996, but legislation passed in December 2014 provided additional investment flexibility that should be welcome to parents and grandparents who use 529 plans to save for their children’s or grandchildren’s college education. Owners of 529 accounts can now change the investment options in their existing plan contributions twice per calendar year instead of just once, allowing them to be more responsive to changing needs, time frames, or market conditions.

The funds in a 529 savings plan accumulate on a tax-deferred basis and can be withdrawn free of federal income tax when used for qualified education expenses at accredited post-secondary schools, such as colleges, universities, community colleges, and certain technical schools. Qualified expenses include tuition, fees, room and board, books, and supplies. Section 529 plans feature high contribution limits (set by each state), and there are no income restrictions for donors.

Each 529 plan has its own rules and restrictions, which can change at any time. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents and taxpayers.

Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses — which contain this and other information about the investment options, underlying investments, and the investment company — can be obtained from your financial professional. You should read this material carefully before investing.

1–2) The College Board, 2013–2014
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.