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College Savings Guide

May 11, 2022

Taking steps now to save for you or your child’s education is one of the wisest financial decisions you can make to help support a bright future. This blog covers important information from Capital Group – American Funds about college savings accounts and strategies that will guide you.

What are the benefits of starting a 529 savings plan?

  • Tax advantages – Tax-advantaged treatment applies to savings used for qualified education expenses. State tax treatment varies.
  • Flexibility – You (the account owner), rather than the beneficiary, maintain oversight of account assets and determine the timing and amount of distributions.

Examples of qualified education expenses:

  • Tuition and related fees
  • Room and board
  • Books and supplies
  • Computers and supplies
  • Student loans

To read more, see Capital Group’s article, “Invest in a Brighter Future.”

What affects the amount of financial aid a student will receive?

  1. Parent and student income and assets – Generally, parental income and assets are treated more favorably than child-owned assets and income.
  2. The investing vehicle housing the assets – The type of investing vehicle housing the assets — 529 college savings plan, Coverdell Education Savings Account, UGMA/UTMA account, Roth IRA or taxable account — helps determine the impact of the assets on aid eligibility.

Five arguments for using a 529 plan to pay for college

  1. Whether owned by the parent or the student, 529 plan assets factor favorably into financial aid calculations.
  2. 529 plan distributions do not count as parental or student income.
  3. 529 plans allow growth free from federal tax, provided assets are used to pay qualified higher education expenses.
  4. Many states offer a state-tax benefit for investing in 529 plans sponsored by the state; some states offer tax benefits for contributions to anystate’s plan.
  5. 529 plans offer considerable flexibility should the beneficiary receive a scholarship or choose not to attend college. Your financial advisor can tell you more.

To read more, see Capital Group’s article, “Understanding the effects of saving and income on financial aid.”