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Funding Higher Education with 529 Savings PlanParents generally don’t have to be convinced of the value of a college education for their children. Studies show that college graduates not only earn more but are healthier, more satisfied with their jobs, and more likely to remain employed during tough economic times.1 But paying for college becomes more challenging every year. Over the last decade, undergraduate in-state tuition and fees at four-year public colleges and universities rose at a 5.6% average annual rate above the rate of general inflation. For the 2011–12 academic year, the average cost of tuition, fees, room, and board reached $17,131.2 Private institutions are even more expensive, although their costs are rising at a somewhat slower pace. For the 2011–12 academic year, the average cost for tuition, fees, room, and board was $38,589 at nonprofit four-year colleges and universities.3

A Tax-Advantaged Savings Plan

As with saving for retirement, the key to saving for a college education is to develop a strategy and make regular contributions. One helpful savings vehicle is a Section 529 plan — a state-sponsored or college-sponsored program designed to help families save for future higher-education costs. Each plan has its own rules and restrictions, which can change at any time. The money in a 529 savings plan accumulates on a tax-deferred basis and can be withdrawn free of federal income tax as long as it is used for qualified education expenses at accredited post-secondary schools, such as colleges, universities, community colleges, and certain technical schools. Qualified expenses include tuition, fees, room and board, books, and other supplies. Section 529 plans feature high contribution limits (set by each state), and there are no income restrictions for donors.

As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan.  Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents and taxpayers.

Source: (1–3) The College Board, 2010–2011

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