Dispelling 3 Misconceptions about 529 Plans
(PRWEB) May 26, 2015 -- May 29 is 529 Day, but despite having a day of national observance, the college savings tool is still a mystery to many.
Two out of three Americans surveyed don’t know what a 529 plan is, according to a recent report from Edward Jones. While college financial aid administrators aren’t wealth advisers and can’t give advice on where to stow college savings, they can offer clarity into what families’ options are, including 529 plans.
529 plans are operated by states or educational institutions and designed to help families put away money to offset the future costs of postsecondary education. Here are some common misconceptions financial aid professionals can help to dispel:
Myth 1 - 529 plan savings will severely limit my financial aid award:
Under the Higher Education Reconciliation Act of 2005, distributions from a college savings plan have no impact on student aid eligibility. The value of these plans are generally treated as assets of the account owner, but assets have a much lower impact on financial aid eligibility than income. Plus, any money saved for college decreases the amount needed to borrow – lowering overall college costs, and increasing the likelihood students will enroll.
Myth 2 - 529 plans can only be be put toward tuition at a state school:
There are two types of 529 plans, and different rules apply to each. The College Savings Plan allows money to grow tax-deferred until it’s disbursed, federally tax-free, at any accredited institution in the country, as well as some outside the United States. The Prepaid Tuition Plan offered by states guarantees the current tuition rate at specific in-state public colleges and will allow the contract value to be transferred to private and out-of-state schools (although the full value may not transfer depending on the particular state). Prepaid Tuition Plans offered by institutions target tuition prepayment to the sponsoring institution (or group of institutions) and may have restrictions on the colleges covered by the plan.
Myth 3 - The federal government taxes 529 plan earnings:
This was almost true. President Obama floated an idea to eliminate the tax exemption on 529 plan earnings in early 2015, but quickly withdrew the proposal after facing almost instantaneous bipartisan pushback. Although contributions are not deductible at the federal level, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for qualified educational expenses for the beneficiary.
For more information on 529 plans and other ways to save and pay for college, contact NASFAA at 202-785-6959 or news(at)nasfaa(dot)org to set up an interview with a subject expert.
About NASFAA
The National Association of Student Financial Aid Administrators (NASFAA) is a nonprofit membership organization that represents more than 20,000 financial aid professionals at nearly 3,000 colleges, universities, and career schools across the country. NASFAA member institutions serve nine out of every ten undergraduates in the United States. Based in Washington, D.C., NASFAA is the only national association with a primary focus on student aid legislation, regulatory analysis, and training for financial aid administrators. For more information, visit http://www.nasfaa.org.
Erin Timmons, NASFAA, http://www.nasfaa.org, +1 (202) 785-6959, [email protected]
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