Higher Education Savings Plans Essay

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Higher Education Savings Plans

Abstract

     This paper is about the Section 529 higher education savings plans that allow family members to receive certain tax breaks while investing for a child’s higher education. The data used in this study is the historical rate of return on a Connecticut 529 plan versus the benchmark, the S&P 500. The time period covered was the inception of this plan starting in 2002 up to the start of research on this study, the end of September, 2004. The tests show that although this particular 529 plan offers tax benefits that could help in investing for higher education, that this particular plan failed to outperform the market during the period observed. Therefore it is my
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Such a plan allows an individual donor to contribute up to $55,000 to the account with couples allowed up to $110,000 without paying gift taxes and without reducing estate tax credits (Malkiel, 2003). But as we know, if it does not outgain the alternative, then it is not a worthwhile cause. Plans have a 10% penalty that is assessed on the income portion of any distribution in excess of qualified higher education expenses as well as a penalty for withdrawals not made for a qualified use. Such penalties are on top of the federal taxes that now must be paid to due to non-qualifying use (Auster, 2003). Therefore, there is a need to examine further just how well these 529 savings plans are performing and whether it is a way to beat the market.

I. Literature Review

There are many positive aspects of Section 529 college savings plans that are attractive to parents and grandparents. These plans are designed to encourage saving for college or post-graduate education of the younger generations. These plans let the family save for any eligible higher education institution in the United States. Qualified higher education expenses include tuition, fees, room and board, required books, supplies and equipment at an eligible institution.
There is no question of the growing popularity in these plans. Their assets had doubled by 2003 and could triple to approximately $50 billion by 2005 (Karp, 2003).
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