Section 529 Plan Better Option than Personal Loans

The 529 plan’s purpose

Although some parents are using personal loans to fund their child’s college education, more and more are jumping on the 529 bandwagon. The 529 college savings plan was first introduced to the market in 1996. It offers people a tax-advantaged way to save for the expense. With private colleges costing more than $30,000 a year and small state-run colleges costing $8,000 a year, parents are looking for ways to afford college.

How the 529 plan works

In former years, parents began using the prepaid tuition plan to fund college. These are accounts that allow parents to “buy” tuition for their child at today’s prices. The cost of college goes up annually, and having a cap on it helps parents afford it. Parents come out ahead if the tuition costs rise faster than average. The problem with these accounts, though, is they are not for everyone. For people who start saving early on, they can work really well. But for those Americans who don’t start saving until the child is already in high school, they typically don’t bring the return people need. It may be better for them to invest in stocks right away because of the higher return on investment.

The 529 plan, on the other hand, is a little different than a prepaid tuition fund in that it is an actual saving account. Individuals can invest in a pool of stock and bond investments with this tool. Asset allocation will be more aggressive for young children and less aggressive for older children. The true value of these accounts is their flexibility and their tax-free status. When your child reaches the right age to go to college, the money is withdrawn from the account and can be put toward education-related expense. That includes tuition, computers, books, room and board and other campus expenses.

Advantages and disadvantages of the account

The biggest advantages of the 529 account are its flexibility and freedom of college choice. These accounts are great ways to fund college and can eliminate the need for costly personal loans. The tax savings too are another reason why many parents are jumping on them these days. Although each state has its own rules regarding this savings method, they remain viable options when it comes to dealing with huge college costs.

On the downside, the thing to remember about these plans is that they aren’t guaranteed. These accounts are serious investment risks and should be thought of that way. Because they are based on investments in a wide range of stocks and bonds, they could potentially lose value. Traditionally firms that manage these accounts start out with risky investments, but move on to less risky ones as your child gets closer to graduation from high school. If that happens when a child is going into college, it could spell disaster for the hopeful parent who thought the account would sustain the cause.

The 529 is affective regardless of criticisms

Despite the problems, the 529 is proving to be a lifesaver to many families. There is a risk, but account holders understand that. They are willing to take the chance if it means a better education funding plan will be at their disposal. Rather than having to rely on personal loans or family help to get a child through college, look into the 529 loan and see if it is the right loan product for you.

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