If you’re wondering how best to save for your child’s future education costs, prepaid tuition plans just became a little more attractive. That’s because the Deficit Reduction Act, signed in February, removed one of the drawbacks of these plans.
You can choose between two types of so-called Section 529 plans, which offer tax-advantaged savings for college costs. In an investment-type college savings plan, you set aside money to grow tax-free until you use it for college expenses.
In a prepaid tuition plan, you lock in future tuition costs at or near today’s prices. Because tuition costs have risen much faster than inflation in recent years, the prepaid plan can be a good deal.
Until now, though, prepaid tuition plans had a disadvantage when it came to financial aid. That’s because college savings plans were considered part of the parents’ funds, while prepaid tuition plans were treated as the student’s assets.
And all of a student’s funds are considered to be available to meet his financial needs, while only a percentage of the parents’ funds are counted that way. So a student with a prepaid tuition plan might receive less financial aid than a student with the other type of plan.
The recent law eliminated this difference, so both types of plans receive equal treatment.
However, prepaid tuition plans still have some drawbacks, mainly because they’re limited to specific groups of colleges. You should examine all the pros and cons carefully before you choose which type of plan to use.
If you’re facing future education costs, please contact our office. We can explain all your tax-favored options for funding your child’s college education.
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