QUALIFIED STATE TUITION PROGRAMS
Significance of the Qualified State Tuition Programs
These programs are specifically designed to help the parents, who have long term plans regarding the education of their children.
Out of 50 states in the United States, 49 states offer Qualified State Tuition programs. These programs are also called as 529 plans. They are divided into 2 forms-
Some plans might require the proof of the residency, which is applicable for the donor as well as, the beneficiary.
PREPAID TUITION PLANS
In the past, the tuition plans were not so effective as the interest earned was negligible. But now- the state plans are more flexible, and they allow you to take money out-of-state, or to any private institution, within your own state.
The plan has its own advantages- in advance, you pay the course fee for a certain number of credits, and you can choose from the two options for payment (instalments or lump sum). Therefore, you don’t have to worry about the inflation of the tuition fee. The plans are also called as prepaid plans, and they guarantee funding at the time of your child’s education.
The rules have changed for since 2002 for the benefit of the beneficiary. Now, you won’t have to pay federal taxes under the following conditions-
TUITION SAVINGS PLANS
These plans don’t guarantee a cover for the tuition inflation. However, the withdrawal is free from federal taxes (if, used for the purpose of education). The financial plan is age based, i.e. the investment experts plan your investment by analyzing your age.
In other words – the younger is your child, the more you have to invest. When your child grows older, the money invested in higher risk equity is gradually transferred into a low risk debt fund like- bonds, investments with a fixed return etc.
Features of the tuition plans-
- Suppose, you have two children, and you are currently saving for the elder child; after saving for a few years you realize that he/she wants to drop his/her plans for the higher education.
In this situation, you can transfer the fund in the name of the younger child (As mentioned earlier the investment is dependent on age).
So, it must be noted that – In case, of the elder brother (with higher age) – the mix of investment (the mix of equity debt ratio) will change.
These plans allow an individual to contribute up to $70,000, conditioned– the individual doesn’t make any further gifts. The Contribution will also vary depending on the permission of the state.
WHICH STATES OFFER THE PREPAID AND THE SAVINGS PLANS?
Nobody can predict the future until and unless they have a magical tool. Hence, it is always advisable to invest carefully while planning for your future. The rules have changed, making custodial accounts less attractive. This makes the state owned plans more attractive, as you are perfectly aware about – what to invest and how much will you get in return.
These plans are governed and affected by various tax laws, so it is advisable to consult a financial expect before you chose the appropriate savings plan.
As discussed earlier, prepaid plans are paid in advance and they guarantee a specific amount of money, for a particular course or the credits.
The following states offer prepaid plan-
Similarly, the savings plans give good returns, but when they are used for educational purposes-they can give tax benefits’.
The following states offer savings plans-
Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kanas, Kentucky, Louisiana, Maine, Maryland
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada,
New Hampshire, New Jersey, New Mexico, New York, North- Carolina, North-Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South-Caolina,
South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West-Virginia, Wisconsin, Wyoming, District of Columbia
It is evident that the majority of the states offers savings plans-whereas, only a few states opt for the prepaid plans.
SAVINGS RELATED TO EDUCATION (Coverdell ESAs)
ESAs are savings meant for education. The savings accounts were created under the Taxpayer Relief Act of 1997.
The following are the features of these accounts-
ESA accounts are considered as an asset of the student (if a student owns the account) by the U.S Department of Education.
In majority of the cases- parents own the account as long as the beneficiary is a minor. This can be a little tricky, because after the student reaches 18 years he becomes the owner, and he/she can assess the fund at the 20 percent financial aid assessment rate, (conditioned he is independent).
We already mentioned, the withdrawal can be tax free- if and only if – the expenses are done for the purpose of education. However, the current laws permit tax free withdrawal on certain expenses, like computer accessories, software, internet access. However, there are certain conditions-
Although, these plans seem to be really attractive-you need to be aware about the drawbacks.
What has changed and how can the change be a drawback?
There have been considerable changes made to these plans by The Higher Education Reconciliation Act of 2005.
Previously, the parents owned the accounts, or transferred the funds to the custodial accounts, and it was considered to be asset for the child. Some Coverdell accounts, transferred the ownership back to the students at the age of 18.
The state-sponsored prepaid tuition plans were not considered as an asset, because the dollar value that was redeemed was considered as a resource, ultimately reducing your aid eligibility.
The plans were linked with the dollars- Therefore, failure to prepay the cost of the credits, resulted in reduction of aid eligibility by dollar amount of credits redeemed.
NOTE- FUNDS HAVE LIMITED CONTROL
State-sponsored plans are undoubtedly very attractive, but you have to be very careful as premature withdrawal leads to heavy penalty. However, after completion of 12 months, the state sponsored plans are flexible, and allow you to change your investment allocation, or move your funds to the other state’s plan.