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College Concern, Part 2

In part 1 of this topic, I discussed a recent survey that showed how parents were either saving for college in the wrong way or planning to finance college through long-term debt. In this post, I go into greater detail about 529 College Savings Plans, which have significant tax advantages for many people saving for college.

While you invest in 529 College Savings Plans with after-tax dollars, the gains on those investments are not subjected to federal income tax if used for qualified education expenses. This is similar to the way a Roth-IRA works for funding your retirement. Many states treat the gains as free from state income taxes as well. To make the situation even better, many states offer state tax deductions for contributions. In some cases, there are residency requirements for joining a state’s plan or deducting interest, so read the disclosures for any plan carefully before enrolling.

Multiple individuals can contribute to 529 plans on a child’s behalf, such as grandparents or other relatives, but you will retain full control of the account. This control also gives you flexibility in naming the beneficiary. If you accumulate more money than the beneficiary needs, or if the beneficiary is unwilling or unable to attend college, you can often use the unused funds for another child. While withdrawing funds for non-qualified expenses does carry capital gain and withdrawal penalty consequences, many people leave unused gains in the plans for siblings or future generations of aspiring students.

Due to the fact that 529s are offered by states, they are not regulated in the same way as other securities. This has led to the criticism that fees for plan administration can be difficult to compare between plans. Fortunately, there are some great resources out there for parents trying to compare their 529 options. I personally found Morningstar’s comparisons very useful. There is a lot of helpful information available at the Saving for College website as well.

By learning about 529 College Savings Plans and comparing the options that are available in your situation, you will be better able to save for college in the most efficient manner. While 529 plans are a great way to go for many families, other options might be even better for some people. We here at Lending Club hope that more and more parents will educate themselves about using a tax advantaged 529 College Savings Plan as one possible way to make their children’s college expenses more affordable. As always, we recommend a diversified approach when considering investment options. For example, consider placing a portion of your available funds in P2P loan portfolios on Lending Club.

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