Qualified tuition programs

It’s extremely worrisome to think about how Americans owe approximately $1.5 trillion in student loan debt and how that number isn’t going to stop climbing anytime soon.

How can we expect our children to be excited for college when they know they’ll be in debt afterward? What steps can we do to better financially prepare our children for college? Continue reading to learn more about qualified tuition programs and how they can benefit your family.


What are qualified tuition programs?

A qualified tuition program, also known as a QTP or a section 529 plan, is a government-regulated program that permits someone to prepay or to contribute to an account for someone else’s college expenses in advance. QTPs are only for eligible education institutions, which, according to the IRS, include “any college, university, vocational school or postsecondary education institution eligible to participate in a student aid program administered by the Department of Education.”

In 1996, qualified tuition programs were established by Congress to help more Americans save money for higher education. In 2018, this type of plan is as important as ever, becoming more popular than education savings bonds and tax-deferred education trusts.

Examples of what is covered under a QTP:

  • Tuition costs
  • Mandatory fees
  • Books
  • Computer technology and equipment
  • Internet service

However, it’s also important to point out that contributions to this type of program aren’t federally deductible and one cannot use a QTP to pay off student loans.


Benefits of qualified tuition programs

QTPs provide multiple incentives, which include:

  • Money is federally tax-free while in the account
  • Up to $10,000 may be withdrawn tax-free
  • Anyone is eligible for a QTP
  • Anyone can contribute to a QTP, whether it’s a relative, a friend, a neighbor or a coach
  • Distributions aren’t taxable when used to pay qualified higher education expenses
  • Any state’s QTPs are available to any American living in any state
  • The contributors stay in control of the account, not the beneficiary
  • One person can have multiple QTPs in multiple states – there isn’t any maximum limit
  • QTPs don’t require a lot of upkeep
  • The state-regulated maximum contribution limits are extremely high
  • Plan options can be changed twice per calendar year
  • QTPs can be used for undergraduate or graduate schools, technical schools and trade schools


Types of qualified tuition programs

The two main types of QTPs are a savings plan and a prepaid tuition plan.

  • Savings plans: Contributions can grow through investing until the beneficiary uses the funds for eligible higher education expenses. Effectiveness will be influenced by the performance of the investment options as well as the rate of rising college costs.
  • Prepaid tuition plans: Contributors prepay for a fixed period of time (such as a certain number of semesters) or a fixed number of credits at current prices for a predetermined educational institution. This type of plan protects against inflation, so contributors pay for the current costs instead of what the costs will be when the beneficiary is in college. However, these types of plans have more limitations on what expenses they cover, including the predetermined institution, as well as residency requirements and other rules.

Plans can now be used for schools before college

As of 2018, QTPs can be used for enrollment at an elementary or secondary school that is either public, private or religious. But the distributions are limited to $10,000 a year.

Are you in need of professional financial advice regarding a loved one’s higher education? Do you have more questions about the benefits or details of QTPs? Please contact the experts at Paragon Accountants today!