529 plans a wise choice for college education

July 1, 2005

Assets in Section 529 plans are not considered student assets in the formulas used to determine financial aid.

A: The Section 529 plan offers many advantages for parents as well as grandparents and others who would like to participate in the funding of a child's college education. The major advantages are as follows:

Flexibility. The money in a Section 529 investment plan can be used for college expenses at any accredited college in any state. By contrast, prepaid tuition plans work best with in-state schools because most plans do not credit a large cash-value buildup to these accounts. Also, section 529 plan assets can easily be transferred between family beneficiaries. If one child does not use the money for college, you can easily designate another recipient-a cousin, niece, or nephew. Grandparents who set up the plans can switch the money between grandchildren. You could also set up your own plan and later transfer the assets to your child.

Financial aid. Assets in Section 529 plans are not considered student assets in the formulas used to determine financial aid. By contrast, assets held in UGMA custodial accounts are considered student assets and are counted seven times more heavily in the financial aid formula when you fill out the FAFSA (Free Application for Federal Student Aid). Moreover, if the grandparents have established the plan, it may not need to appear even as a parental asset on the FAFSA form (this varies from state to state).

High contribution limits. Many other college savings plans either limit the amount of contributions each year or place restrictions on parental income. Section 529 plans have very high limits: a one-time $55,000 contribution per donor and state-imposed maximum total contribution limits that range as high as nearly $300,000. The contributor does not have to be a parent, grandparent, or even a relative. You can make a contribution for any living beneficiary who plans to attend college.

If you're an adult who plans to attend law school or medical school, you can contribute your own savings to a Section 529 plan. If you don't use the money, one of your future children can. If a child is awarded funds from an accident or medical settlement, some of that money could be deposited in a Section 529 plan to grow tax free, as long as the settlement allows.

Section 529 plans make good sense for a lot of people, but once again, all options should be carefully explored with your financial adviser.

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