The cost of a college education has skyrocketed, and the result has been extensive student loan debt that has put a huge burden on graduates emerging from institutions of higher learning to find a way to make massive monthly loan repayments. Students and parents alike are always on the lookout for ways to make educational expenses easier to manage by preparing for costs well in advance. 529 plans are a key element that families can use to save for college and get valuable tax benefits, but there are a lot of things you need to understand about 529 plans to make the best use of them. In particular, the following facts are useful to help you choose the best 529 plan and to squeeze as many benefits as possible from your college savings.

1. You can choose a 529 plan from any state, not just your own

Most 529 college savings plans are associated with a particular state. Many savers mistakenly believe that you must use your state's 529, but that isn't the case. You're always free to use a 529 from any state that allows nonresidents to participate, and all but a handful of 529 plans gladly accept contributions from people across the nation.

In some cases, it makes financial sense to use your state's 529 plan. Several states offer state income tax breaks to residents for making 529 plan contributions, and in most cases, those tax breaks are contingent on using the home state's 529 rather than another. However, a small number of states give deductions for contributions to any 529 plan.

A line of new college graduates on campus.

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More importantly, picking the right 529 plan requires looking at costs as well as benefits. Expenses related to 529s can vary greatly across states, and in some cases, it will make sense to give up a tax benefit from using a high-cost plan in order to reap the greater savings from using a low-cost plan. Morningstar and other fund analysis specialists offer looks at 529 plans, with proprietary rating systems that can help you make the right decision for your situation. It pays to run the numbers and see which plan is most likely to leave you ahead.

2. 529 plans have different impacts on financial aid, depending on who owns them

Schools take 529 plan balances into account in determining financial aid. But the way they do so depends on the ownership of the 529 plan account.

If the student or a parent owns the 529 plan, then the assets are treated as parental assets on the Free Application for Federal Student Aid. Parents are expected to spend a set percentage of their assets on their child's education each year, and so the greater the assets they have, the smaller any financial aid award will be. However, the percentage for parental assets is far smaller than the percentage for an asset considered to be owned by the student, so 529 plan assets are typically better than custodial accounts from a financial aid standpoint.

Some families seek to get around the financial aid implications by having grandparents own 529 plan assets. Grandparents aren't required to include 529 balances on the FAFSA form. However, distributions from a grandparent-owned 529 can have an even bigger adverse impact on financial aid, because schools will treat those distributions as income and reduce future aid by as much as 50% of the distributed amount. It's therefore essential to consider not just various sources of funding for college but also the timing of using them so as to avoid unnecessary reductions to financial aid.

3. Here's what happens if you overfund your 529

It is possible to put too much money into a 529 plan. Contribution limits are extremely high, with some 529 plans allowing you to contribute $400,000 or more toward college education. Even if you contribute far less than that, investment earnings can make the balance grow to be more than your child needs for educational expenses.

529 plan account owners have several options if they have excess money after paying for college. They can keep the account as-is with the expectation that the child will have more educational expenses in the future. They can also change the beneficiary on the account, allowing for its use for another member of the family. Finally, they can simply withdraw the money, in which case they'll pay tax on the returns that their initial contributions produced, along with an additional penalty equal to 10% of the account earnings.

There are some exceptions to the penalty rules. If the student receives a scholarship, then withdrawals of that amount aren't subject to the penalty. Students who attend a U.S. military academy can also qualify for penalty forgiveness, and the death or disability of the student also qualifies as a penalty exception. However, you'll still owe income tax on the earnings withdrawn in those cases.

College is expensive, and 529 plans can help you manage educational costs more effectively. Knowing the facts will let you make better decisions about college saving and make it easier to help you support your child's educational efforts.

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