529 Plans: Saving for Your Child's Education

by Alicia Bodine, Contributing Writer

Image © 401kcalculator.org; Flickr.com

Tuition for Colleges and University's has become so expensive it is necessary to make a savings plan for your child's education as soon as he or she is born. Private schools average $20,000 per year with State Colleges coming in at $10,000. A 529 Plan is an option that every parent should consider and comes with many added benefits.

There are two types of 529 plans: prepaid and savings. Each state has at least one 529 Plan. It is the state that decides whether they are going to offer a 529 plan and what that plan will look like. The plans offered by the State are generally savings plans. These plans can be used to pay any accredited College or University. Prepaid plans are offered by the Educational Institution itself. This is good if you know the particular College or University your child is going to attend. You can easily set up a plan with the school and begin to pre-pay your child's tuition.
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There are no income or age restrictions associated with either 529 Plan. This allows you to start out small if you cannot afford to start out with a large contribution.​

There are 3 Major benefits you can get from a 529 Plan:

1. The Tax Breaks: You are not required to pay taxes on your money while it is growing. Also, whatever money is dispersed to your college student often times comes out tax free (with the federal government). Each state offers different tax breaks you can check out as well.

2. You are always in control of the funds: You decide when to withdrawal money from the plan and for what reason. Most of the time you can even reclaim the money for yourself should your child decide to drop out or not attend college at all. Of course there are penalty fees and taxes you must pay if you choose this route.

3. Convenience: You can set up the plan and basically forget about it. It is as easy as 1,2, 3. 1. Complete the enrollment form, 2. Make your contribution, and 3. Set up automatic withdrawal (optional).

Finally, if you are wondering how having a 529 Plan will affect your chances of getting grants and loans, a new law was passed for the 06-07 school year. No 529's in a student's name will count against them as assets. For plans in a parent's name, however, the Federal aid will be reduced by 5.64% of the plan's value.

This article originally appeared on the Yahoo Contributor Network.