Cliffs notes for college payment strategies
by. Amaia Kirtland
College students who borrow to attend college graduate with a debt load equivalent to a new-car purchase or a down payment on a house, averaging $25,000. Some borrowing might be inevitable, but also explore the features of other college payment strategies (Kiplinger Aug. 26).
529 savings plans
- Pros: Your savings grow tax-free and earnings escape federal tax if you use withdrawals for qualified college expenses. Your state might give you a tax break for contributions; you may invest in other states’ 529 plans.
- Cons: If you use the money for non-college expenses you’ll have to pay taxes and a penalty on earnings. A state-appointed firm manages the account you so lose direct control.
Prepaid tuition plans
- Pros: You can lock in tuition at in-state public colleges years in advance. The tax benefits are the same as for a 529 savings plan. If your student goes to an out-of-state or private school instead, you can transfer the value of the account or get a refund.
- Cons: Not all states participate. If you use the money for non-college expenses you’ll have to pay taxes and a penalty on earnings.