FINANCIAL AID
Section 529 College
Savings Plans
What's the difference
between a prepaid tuition program and a savings program?
Prepaid Tuition: Essentially, parents, grandparents, and other interested parties
may lock in today's tuition rates, and the program will pay out future college
tuition at any of the state's eligible colleges or universities (or an equal
payment to private and out-of-state institutions). Amounts of tuition
(semesters) may be purchased through a one-time lump sum purchase or
installment payments. The program pools the money and makes long-range
investments so that the earnings meet or exceed college tuition increases in the
state.
Savings Plans: Savings plans allow participants to save money in a special
college savings account on behalf of a designated beneficiary's qualified
higher education expenses. Contributions can vary, depending on the individual
savings goals. Savings plans offer a variable rate of return and are not backed
by the state or guaranteed in any way.
Both types of programs are "qualified state
tuition programs" under the Internal Revenue Code Section 529 (26 U.S.C.
529). This allows earnings to be federally tax deferred until the beneficiary
enters college, and earnings are then taxable at the beneficiary's typically
lower tax rate rather than the contributor's. Earnings are exempt from state
income tax. With the 2001 tax act, the savings offered by 529 plans became more
significant. Beginning in 2002 and lasting through 2010, money taken out of a
529 plan and used for educational purposes will be tax-free.
·
Saving for
College is a great spot for information on pre-paid
tuition and college savings plans. Founded by a CPA who wanted to know more
about 529 plans, this site is aimed at anyone who wants to know more about the
details of and differences among the available plans. What to be aware of,
loopholes, tax questions, etc. are all found here. Ratings and explanations of
the various states' programs are here. Before you select a plan, spend some
time reading here. Their "Links" section is also quite helpful.
·
Illinois and over
30 other states have Section 529 plans, and (of course) there is a web site
available to link you to any of those state approved programs. The National
Association of State Treasurers'College Savings Plans Network is the place
to go if you want the "official" information on the various
programs offered by the different states. Some states' programs are
quite flexible, while others are more restrictive.
·
Have you seen the signs
at retail stores letting you know that a percentage of your purchases could go
into a fund for sending a child to college? These credit
card rebate and loyalty programs are similar to frequent flyer
miles with the airlines or any other program that rewards loyalty to a brand or
store. A small percentage of what you spend can be put into a Section 529 plan.
There are a number of these programs, with Promises being the most popular.
Some are free, others have a yearly fee. A plus to these is that registration
is easy and your friends and family can also register and have their spending
help your account! (Editorial: View these as supplemental ways to fund the 529
plan, it's doubtful that Susie or Johnny will be going to the University for
free based on your spending at Borders and McDonalds.)
State of Illinois Programs
·
College
Illinois!, a Section 529 Prepaid Tuition Program run
by the Illinois Student Assistance Commission, delivers like no other college
funding option. The control you want... the protection you need... and the
peace of mind you deserve. Benefits are good in state, out-of-state, at public
and private colleges and universities. They're 100% state tax exempt, and will
not affect student financial aid awarded by any Illinois state
agency. The program is open to all Illinois residents, and to all
non-residents buying for Illinoisans, regardless of income levels.
·
Bright
Start is an Illinois Section 529 College Savings
Program that gives parents, grandparents and friends of a child a better
way to save for college. The program has been designed by the State
ofIllinois and State Treasurer Judy Baar Topinka as a qualified state
tuition program under Section 529 of the Internal Revenue Code. Through Bright
Start, you can choose from several investment options-each designed to help you
meet the rising costs of college. Any earnings on your investment will grow
faster because they are federally tax-deferred. When the child reaches college,
your investment can be used to pay for a wide range of expenses at eligible
schools nationwide. At that time, earnings are taxed at the student's federal
income tax rate-typically about 15%.
