If you have children or are about to start a family, than saving for college may be something you are looking into. One of the most popular methods for college saving is a college savings plan. College savings plans (also known as “qualified tuition programs”) were created under the Small Business Job Protection Act of 1996 (SBA ’96) to allow taxpayers a tax-advantaged way to save for higher education expenses for a designated beneficiary. A college savings plan may be provided by a state, an agency of the state or by an educational institution. In this article we will look at this type of plan and how it works to help you save for your educational costs.
There are two types of college savings plans, a prepaid tuition program or a private college savings plan. Prepaid tuition programs are typically offered by the state. They are used at eligible state educational institutions and allow you to purchase credits covering tuition in advance. The credits are designated to a beneficiary. A Private College savings plan are offered by participating private colleges and universities. Similar to the prepaid tuition program, you can purchase tuition certificates to be used at any of the institutions.
To use any of the plans mentioned above, there needs to be an eligible beneficiary. So what does it mean to be eligible? Different plans have different requirements. There are particular plans that may only allow participants that are residents of the state, but some may allow participants regardless of their residence. Since the rules of eligibility differ by plan, it is important to check with the plan to know their requirements for establishing an account. Another element of eligibility is enrollment periods. Be sure to know when accounts are allowed to be open.
How the funds you contribute will be invested are determined by certain factors. The portfolio is typically based on your child’s age and the time frame for when the funds will be needed. The portfolio is also rebalanced automatically based on your child’s age to make sure the most suitable asset allocation is used. The closer your child gets to college the fewer risks the portfolio will have to make sure nothing happens to your money when you need it most.
College savings plans must be used for qualified higher education expenses. Examples of these types of expenses are tuition, textbooks/supplies, schools k-12, computer equipment and software, internet access, room and board, and special needs services. It is important to note that student loans are not eligible.