New rule may affect your college savings plan

If you're facing college expenses, you should be aware of a recent provision for prepaid tuition plans that can affect available federal student aid.

First, let's review the two forms of 529 plans – college savings accounts and prepaid tuition programs.

• College savings accounts are state-sponsored investment accounts that let you build a fund for your child's college expenses. Once in the plan, your money grows tax-free. Provided the funds are used to pay for qualified college expenses, withdrawals are tax-free. Qualified expenses include tuition, fees, books, supplies, and certain room and board costs.
  
• Prepaid tuition programs are designed to hedge against inflation. You can purchase tuition credits, at today's rates, that your child can redeem when he or she attends college. Using tuition credits from these programs is tax-free.

One disadvantage of prepaid tuition plans had been their adverse treatment for federal student aid purposes. Available federal aid was reduced dollar-for-dollar for each dollar withdrawn from a prepaid tuition plan.

The recent change treats funds available from prepaid tuition plans the same as those from college savings plans. Both are considered parental assets, of which current federal aid rules assume 5.64% are available for college.

The new provision generally makes “prepaid plans” more attractive than before, but there are still other factors to consider. Please call us if you would like details or planning assistance.