Planning ahead
Helping your children be prepared for continuing their education after high school graduation begins early. Supporting their learning and academic success is critical from their earliest years.
It is also important for families to think ahead about how they are going to pay for their children's education after high school. However, there is no one college saving strategy that all families should follow. The financial situation and needs of every family are unique. It is important that you and your children talk about their educational goals and begin planning for how you can help make them a reality. Some good advice for everyone includes:
- Start saving as early as possible
- Put money away consistently and regularly
- Learn about different savings plans and how they affect your tax liability and your children's financial aid eligibility
- Stay on top of changes in the tax code and the financial aid regulations
There are many ways to save money for college. Education Savings Accounts (ESAs), or College Savings Plans, are becoming a popular option for parents saving for a child's college education. Also known as "529" plans, they are state-operated investment plans that give families a federal tax-free way to save money for college. Authorized by Congress in 1996, they are officially known as qualified tuition programs (QTPs), but usually referred to as "529 plans," "state 529 plans," or "section 529 plans," after the section of the Internal Revenue tax code that regulates the plan's special tax breaks.
Though the plans available differ from state to state, they are all exempt from federal income tax. There are two types of 529 plans--college savings plans and prepaid tuition plans. Nearly every state has at least one of these two options and many states offer both. At this time, Oregon offers college savings plans but not prepaid tuition plans.
What are college savings plans?
With a college saving plan, parents may save money for college expenses at any college. When families save for college in this way, they can use the money for tuition, books, supplies, fees, and some room and board costs.
College saving plans differ from state to state but all are exempt from federal income tax. Their benefits include:
- they are open to anyone with no residency restrictions and no cap on income level;
- they have a low impact on the student's chance for future federal financial aid;
- they can be used at most schools;
- the account holder controls the money for their selected beneficiary;
- large contributions are possible;
- plans have gift tax exemptions;
- there are no age restrictions for selecting a beneficiary; and
- the beneficiary of the plan can be transferred to another family member.
Additional benefits of the Oregon college savings plan for Oregon residents include:
- contributions of up to $2,000 per tax year are deductible on the Oregon income tax;
- earnings under any plan in the Oregon 529 College Savings Network grow tax-free; and
- qualified withdrawals are Oregon and federal tax-free.
In calculating the expected family contribution for financial aid, the money in the plan is treated as belonging to the parents. Only about five percent of the college saving plan's value is considered when computing expected family contribution for each college year.
However, college saving plans are not risk free. They may post losses in a negative stock market. Some plans charge an account manager fee. Tax benefits on withdrawals currently end in 2011; they will need to be extended by Congress at that time. It is important to understand the benefits and risks before opening a college savings plan.
What are prepaid tuition programs?
In some states, you can join programs that allow you to pay tuition in advance, at current rates. At this time, only 19 states sponsor prepaid tuition programs. Currently, Oregon does not sponsor prepaid tuition programs.
Prepaid tuition programs sometimes require that students choose a public institution in the same state. Parents can pay a lump sum or make periodic payments to pay for college tuition in advance. Because each state's plan is different, it is important to learn the benefits and obligations before joining.
States, like Oregon, that do not have a prepaid tuition program may offer college savings plans. Both programs allow tax savings to parents and families. As with other savings programs, they are an investment with low risks but limited returns.
| Other resources: For information and Web links to state plans contact the College Savings Plans Network. The Network is an affiliate to the National Association of State Treasurers. The Network serves as a clearinghouse for information among existing college savings and prepaid programs. CSPN monitors federal activities and promotes legislation that affects state programs. |
| College Savings Plans Network, National Association of State Treasurers at http://www.collegesavings.org/ | |
| Oregon 529 College Savings Network at http://www.ost.state.or.us/divisions/college/index.htm |
Parts of this information were adapted from the Oregon Career Information System (CIS) with permission.