It’s never too early to invest in your child’s college education.
Millions of students recently bid farewell to summer vacation and hello to college life. According to the National Center for Education Statistics, more than 20 million people are expected to attend degree-granting, post-secondary institutions this year.
Many of those students will be forced to take out student loans. To date, Americans owe more than $1.4 trillion in student loan debts, according to the Federal Reserve.
In this state, there is a program called Maryland 529, which allows families to save for college and reduce the need for student loans. Jmore recently spoke with Lauren Shipley, executive director of Maryland 529, about the program and what’s needed in saving for college.
What is Maryland 529?
Maryland 529 is an independent state agency that administers the two different 529 plans for the state of Maryland. 529 refers to the IRS tax code that allows families to save for college in a tax-deferred way. Maryland 529 used to be called the College Savings Plans of Maryland. While the name changed in July 2016, everything regarding the plans stayed the same.
There are two different Maryland 529 plans — the Maryland Prepaid College Trust and the Maryland College Investment Plan. What is the difference between the two plans?
The Maryland Prepaid College Trust allows families to lock in tuition at today’s prices for future benefits that are based on the age and grade of the child. It’s a fixed payment plan that can be used for in-state or out-of-state colleges. The Maryland College Investment Plan is similar to a 401(k) where you choose a dollar amount and investment option and that amount grows based on the investment options.
What are the benefits of having a Maryland 529 plan?
The main benefit is the state income deduction. Account holders and those who contribute to a Maryland 529 account who have Maryland taxable income can get up to a $2,500 income deduction each year for the money they put into the plans. There is also tax-deferred growth in the account, meaning as long as the money is used for higher education it grows in the account tax-free and comes out of the account tax-free. Having a Maryland 529 plan also reduces the need for student loan debt.
Why is it important to set up a college savings account?
The most important reason to set up a college savings account is to reduce the need for student loan debt. We found families who save for college end up paying less overall than families who pay for college using loans. Student loan debt is very burdensome for a young person starting out with a low income. It can also prevent those young adults from buying houses and cars. By having a college savings plan, it allows for people get to those necessities quicker and sets them up for the rest of their life.
Why would someone want a college savings account as opposed to a regular savings account?
There are two main reasons. The first is the tax-deferred growth I mentioned above. The money is growing in the account in a tax-deferred way where you aren’t paying income taxes on the money earned. That allows you to have more money by the time you need to use it on qualified expenses, including books, room, board and other mandatory fees.
The second reason, and maybe the more important one, is that regular savings accounts usually don’t outpace tuition inflation. With savings, you get about .5 percent interest, which is very low in comparison to what tuition inflation is on a national level. Tax-deferred plans allow you to have more diverse investment options, more growth potential, and can potentially outpace tuition inflation.
You mentioned qualified expenses. What are those qualified expenses that the money can be used for?
Generally, the money in the college savings account can be used on tuition, books, mandatory fees, room and board, and laptop computers.
What should parents know about the two different plans?
A lot of people hear the word Maryland in the name and assume it can only be used at a school in Maryland. However, the money can be used at schools across the country with the Federal School Code, which includes the majority of schools. Also, if your child gets a scholarship that covers tuition, you can use the money in your account for any other qualified expenses.
Finally, the accounts can be transferred to other beneficiaries that are blood related or by marriage — so it can be used for siblings, spouses or other children. For example, we have seen military personnel who receive the GI bill and no longer need the plans their parents set up. Those people are able to transfer the plans down to their own children.
Can you provide more details about the Maryland Prepaid College Trust plan?
The Maryland Prepaid College Trust is initially limited to tuition. However, if the student receives a scholarship or grant, the money can then be used on other qualified expenses such as room and board, for example. This plan provides families with a fixed payment plan, so it is for those people who are comfortable making fixed, consistent payments. With this plan, we tell you how much to pay. The board of directors is doing the investing, allowing families to be sure there is money in the future and providing them with a sense of safety.
And what about the Maryland College Investment Plan?
The money saved in the Maryland College Investment Plan can be used for any of the qualifying expenses at any time. It can also be used at trade or specialty schools. This plan is more flexible then the Maryland Prepaid College Trust. There is a onetime $250 payment needed to open the account. This fee can be paid in full or in $25-a-month installments that are made automatically.
After the initial contribution, there is no minimum. Account holders can add money on their own schedule and can decide how much to pay based on their budget. This plan allows for more flexibility for how you contribute and how much you contribute.
Should a college savings account be something all parents think about, even those with newborns?
As a general rule, we say it is never too early to start saving. There is a benefit to starting an account early because you can start with smaller amounts of money and those smaller amounts can make a difference over time with the tax-differed growth.
Parents can even open an account before a child is born. In that case, the parent would use his/her own Social Security number and the beneficiary until the child is born. Once the child is born, parents can add the child’s Social Security number and switch the beneficiary to the child.
How much money does someone have to put into his/her account each year?
We never tell people to put a certain amount of money in the account; it’s really going to depend on their budget. For the Maryland College Investment Plan, people can put in whatever amount they want. For the Maryland Prepaid College Trust Plan, the amount of money will depend on the payment schedule. There is a calculator on our website that people can look at and enter some variables to figure out what pricing may look like based on a college their child wants to go to.
What do you want people to know about saving money for college?
Sometimes, people find the idea of saving for colleges overwhelming because they don’t know how much to save. But you can cut the college cost in half by saving on any level. It’s important to just start—start early if possible, set realistic goals and understand that any amount saved helps reduce that need for student loan debt.
Who can put money in the account?
Anyone can put money into a college savings account; it doesn’t have to be the account owner. Family and friends can make contributions as well. There is currently a gifting option on our website and we will be introducing a new gifting platform in the next couple of months that’s going to be integrated with social media. It won’t store personal data but will allow people to make electronic payments without being intrusive.
If you have the Maryland Prepaid College Trust Plan, the money gifted would be applied to the account owner’s fixed payment. With the Maryland College Investment Plan, the money is just added to the account.
How does one go about setting up the Maryland 529 Plan?
You can either go online to our website or you can give us a call and we will mail out an enrollment kit for you to complete. The number to call is 1-888-4MD-GRAD. We are here to help in any way that we can.
For information, visit maryland529.com.
Aliza Friedlander is a Baltimore-based freelance writer.
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