Question 1

What is a 529 plan and how does it help with college savings?

Accepted Answer

A 529 plan is a tax-advantaged savings plan designed for education expenses. Contributions grow tax-free, and withdrawals for qualified education expenses (tuition, room and board, books, supplies) are also tax-free at the federal level. Many states offer additional tax deductions or credits for contributions. There are two types: savings plans (investment accounts) and prepaid tuition plans.

Question 2

How much should I save each month for college?

Accepted Answer

The amount depends on your child's age, the type of college you're targeting, and how much of the cost you want to cover. A common guideline is to aim to save about one-third of projected costs, with the rest covered by financial aid, scholarships, and current income at the time. Starting early is key -- even $200-300 per month from birth can grow to cover a significant portion of in-state public university costs.

Question 3

How does financial aid affect my savings strategy?

Accepted Answer

Financial aid can come in the form of grants, scholarships, work-study, and loans. The amount you receive depends on your Expected Family Contribution (EFC), the school's cost of attendance, and available funding. Having savings in a 529 plan has a relatively low impact on financial aid eligibility -- only about 5.64% of parent-owned 529 assets are counted in the EFC formula, compared to 20% of student-owned assets.

Question 4

Why do college costs rise faster than general inflation?

Accepted Answer

College costs have historically increased at 5-8% per year, well above the general inflation rate of 2-3%. This is driven by factors including rising administrative costs, expanded student services, facility upgrades, technology investments, reduced state funding for public institutions, and increased demand for higher education. This is why it's crucial to factor in education-specific inflation when planning.

Question 5

What other savings options exist besides 529 plans?

Accepted Answer

Beyond 529 plans, you can consider Coverdell Education Savings Accounts (ESAs) with a $2,000 annual contribution limit, custodial accounts (UGMA/UTMA), Roth IRAs (contributions can be withdrawn penalty-free for education), taxable brokerage accounts for flexibility, and U.S. Savings Bonds (Series I and EE). Each has different tax implications and impact on financial aid eligibility.

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Frequently Asked Questions

What is a 529 plan and how does it help with college savings?

How much should I save each month for college?

How does financial aid affect my savings strategy?

Why do college costs rise faster than general inflation?

What other savings options exist besides 529 plans?

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