Update

A new law in the works in the US House of Representatives may change how you can use money in your 529 account in 2011 and beyond. If passed, the law makes three major changes:

  • Lets you continue to use 529 money to buy computers and related equipment and services for the student to use while in school. The current rule, which was made as part of the American Recovery and Reinvestment Act of 2009, or "Stimulus Package," was temporary and is set to expire
  • Gives you the opportunity to change your investment or move your money twice per year to maximize your gain. Again, this current rule is temporary and set to expire. If the new law isn't passed, the old rule goes back into effect and you can move your money only once per year
  • Applies the "Saver's Tax Credit" to certain 529 accounts. Currently, this federal tax credit is available only to taxpayers with low- and moderate-income who save for retirement. The new law gives the credit to taxpayers with low- and moderate-income who save in 529 accounts

If you like the idea of these changes, contact your representatives in Washington and ask them to support the new law.

Original Article

Anyone with kids or grandchildren can probably tell you about how the cost of college tuition has skyrocketed over the past decade or so. Some started planning ahead, maybe years ago, by investing and saving. Unfortunately, for many the investment may not work out as planned.

Plans

All 50 states, including the District of Columbia, offer some type of college savings plan. They're usually called "529 plans," or "qualified tuition plans." The idea is simple and worthwhile: Parents, soon-to-be parents, and even grandparents can start saving now for a child's future college education costs.

Generally, there are no state or federal taxes on the money when it's withdrawn from the plan and used for college. There may be taxes and penalties in some situations, however. A good example is if the money isn't used for college - such as when the child decides not to go to college

There are two types of plans:

Pre-Paid Plans

Generally, these usually are set-up for in-state public colleges, but it's possible to use the money for private or out-of-state schools. Under this type of plan, you pay in advance all or part of college tuition, in one lump sum or over a period of years. The amount you pay is based on the cost of tuition on the date you start the plan.

In exchange for your money, you get a tuition "contract" or tuition "units" to use when the child enters college. Some plans are "guaranteed," meaning if you pre-pay the entire cost of tuition, you won't have to pay anything more, no matter how much tuition increases between the time you made the pre-payment and the time the child graduates from college.

Savings Plans

Usually, these types of plans can be set-up for use at any college across the country, public or private. Here, you create an account for your child, the "beneficiary," and invest that money through the plan. Stocks, bonds, and money market funds are the typical investment options.

There's usually no "guarantee" in a 529 savings plan.

What's the Problem?

The economy, plain and simple. Many states - just like many US families - are having trouble with their budgets in these tough economic times. To help cover short-falls in their budgets, many states are increasing the cost of tuition at state-funded or "public" colleges and universities.

And the coffers in some states are so low their "guaranteed" pre-paid tuition plans may not be guaranteed at all. In fact, they may run out of money. Just ask Patti Lambert. For 16 years, she invested over $100,000 for her eight grandchildren in Alabama's pre-paid tuition plan. Under that state's plan, the state promised to cover all of each child's tuition costs no matter how much it increased over time.

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Tagged as: Education Law, School Law, college nest egg, school law lawyer