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What is a 529 Plan?

Are you ready to pay for your child's college education?

According to the Institute for College Access and Success, 69 percent of all graduates from public colleges in 2013 have an average student loan debt of $28,400. That's only for a bachelor's degree. If your child goes to law school, add about $84,000 to $122,000 more in student loans. Does your kid want to be a doctor? Expect to pay nearly $300,000 for medical school.

Have you been saving for college? Have you heard of a 529 Plan?

What Is It?

A 529 plan, authorized by Section 529 of the Internal Revenue Code, is a savings plan for future college expenses. All states and some private colleges and universities offer 529 plans.

Two Different Plans

There are two types of 529 plans.

Pre-Paid Tuition Plans

The pre-paid tuition plan allows savers to buy units or credits at participating colleges and universities. Some plans also cover room and board.

Most pre-paid tuition plans are sponsored by the states, and require the owner of the plan or beneficiary to be a state resident. An added benefit of pre-paid tuition plans is that it locks in the price of tuition. Since many colleges raise tuition prices every year, you could be saving a lot of money.

College Savings Plans

College savings plans are like general investment accounts. The college savings plan invests money contributed on behalf of the account holder. Unlike pre-paid tuition plans, college savings plans cover all "qualified higher education expenses." This can include tuition, room and board, mandatory fees, books, and even computers.

Benefits?

In addition to being responsible financial planning for the future, 529 plans offer special tax benefit. Earnings contributed into a 529 plan are exempt from federal tax and, in most cases, state tax.

Penalties?

However, remember that money in your 529 plan can only be used for qualified higher education expenses. If you use the money from your 529 plan to buy a fancy new car instead of paying for next semester's tuition, you will have to pay income tax and an addition 10 percent federal tax penalty on interest earned.

If you have children that may one day go to college, you may want to start saving as soon as possible. It's a lot of money.

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