529 college savings plans: 8 things you should know - KFDA - NewsChannel 10 / Amarillo News, Weather, Sports

By Andrew Housser

Earning a college degree these days is not an inexpensive undertaking. As universities continue to raise tuition rates, more students -- and parents -- are scrambling to find ways to finance a higher education.

Taking out a student loan (or multiple loans) is an option. Grants, scholarships and financial aid also help. Yet one of the simplest ways to save and pay for college -- a state 529 savings plan -- is still widely underused and often misunderstood. These plans are named for section 529 of the Internal Revenue Code. A 529 savings plan provides an excellent way to set aside money for your family's future college education expenses, or even for your own college purposes. Here are eight reasons to start a 529 program today.

1. You'll enjoy some tax breaks.

When you open a 529 plan, your money is invested in mutual funds, stocks or fund portfolios. The interest earned on these investments grows tax-free. Neither you nor your children will have to pay taxes when the time comes to withdraw the funds. (Funds can be used to pay for qualified higher education expenses, such as tuition, fees, books and supplies.) Some states even exempt your contributions from state income tax. Unfortunately, 529 contributions do not lower your federal taxable income.

2. You have lots of options.

The hardest part is choosing the best 529 plan for your family. Every state, plus the District of Columbia, has at least one 529 plan. You do not necessarily have to reside in a particular state in order to open a 529 plan there. Nor do your children have to attend college in that state. Just as you would when picking mutual funds for your IRA or 401(k), you'll want to research and identify the plans offering the best and safest return on your investment. Once you enroll in a 529 plan, contributions can be automatically deducted from your checking account if you wish.

3. You can start saving for your children's education before they exist.

If you know kids are part of your future, you can open a 529 plan today in your name. This is a smart move for would-be parents who have more disposable income before baby arrives. Later, you can change the beneficiary to your children after they join your family (via birth or adoption).

4. You can fund your own education.

College savings plans aren't just for families with children. Anyone can start a 529 plan and name an individual of choice as beneficiary. This is a great way for extended family and close friends to help, and can represent wonderful holiday or birthday gifts.

5. The money can be used for something other than college.

Maybe your child will decide not to attend college, or perhaps you need a cash infusion now. You can reclaim your actual investment at any time without incurring penalties on the principal. However, you will pay taxes and an approximate 10 percent penalty fee on the interest that accrued while your money was invested.

6. It's flexible.

As long as your plan permits it, you can change to a different investment option every year. You also may roll over your account to a different state program once every 12 months.

7. You're in charge.

When you open a 529 account, you will be asked to name a beneficiary. But the beneficiary doesn't have free access to the account. It's up to you to decide when withdrawals are taken and for what purposes.

8. It's not a financial aid deal breaker.

A 529 account is generally considered to be a parental asset -- not a student's. This means the money saved in a 529 account modestly affects a student's federal financial aid package, by about 5.6 cents per every saved dollar. In comparison, funds stored in a parent's checking or savings account will subtract up to 20 cents per saved dollar from financial aid.

In recent years, the amount of national student loan debt has surpassed credit card debt.  College savings plans, such as 529 programs, are one of the best ways for families to help reduce their children's possible future debt burden.

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.