Congress created 529 plans in 1996 as a way for parents and grandparents to save for a child’s undergraduate college education. Now, a growing number of MBA students are using the tax-deductible savings plans to pay their way through B-school, says Michael Fitzgerald, treasurer of the state of Iowa and president of the College Savings Plans Network, a nonprofit that compiles information on such plans across the country.
The 529 savings vehicle may not be for everyone. If your MBA plans fall through and you want your money back, expect to repay any annual tax deductions and 10 percent of the interest earned. Also, the upside to such a plan isn’t as great if you live in a state that has no income tax deduction. Investment options within a 529 plan may also be limited, depending on the route you go. Fitzgerald spoke to Bloomberg Businessweek’s Erin Zlomek about what prospective MBA students might consider as they start saving for the degree. Below are edited excerpts of their conversation.
What are the tax advantages of a 529 plan for a potential MBA?
The big advantage is if you start early, the money you invest grows tax-free. If you’re saving for your MBA and live in a state where there is an income tax deduction, that is a huge advantage because you can write off what you put in. You can also attend a part-time program and continue to work and still take the deduction. Also, if your parents or grandparents opened a plan when you were younger and used it to pay for your undergraduate education, they could keep it open and continue to make contributions that can be used toward a graduate degree.
What happens if someone opened a plan and doesn’t wind up going for their MBA?
You could keep it open in case you decide to pursue a different degree. You could also transfer the plan to a member of your family. (The money can only be used to pay for postsecondary education.) You can’t use the money to pay back student loans. And, if you want your money back, generally you must repay any deductions taken on the plan as well as 10 percent of the interest earned.
How do you open a plan?
Forty-nine states and the District of Columbia have options. Wyoming is the only state that doesn’t. Most states offer a couple of different plans, which can be viewed at collegesavings.org. You can set up a plan directly through your state. In Iowa, for example, you can create one online and immediately transfer money into it. You can also go to a financial planner.
If you set one up through your home state, it’s a lot cheaper. New York charges about 0.17 percent (17 basis points) a year to manage its plans, and Iowa charges 0.28 percent (28 basis points) a year. A financial planner may charge you 1 percent to 1.5 percent a year plus a load fee. The advantage [of using a financial planner] would be that you have more investment choices. Through a state, you may only have preset funds to choose from. Iowa’s preset funds are managed by Vanguard.
What are the different options you mention?
There are the savings plans and, in addition to those, about 10 states have what are called prepaid plans. This is where you can go to a college—typically a state school—and buy a year’s tuition in advance. This would essentially lock in the price of tuition that year in a contract, which can be used at some point in the future. This does not, however, guarantee admission to that school. Michigan, Maryland, Washington, and Alabama are states that have these types of plans. They’ve been a great deal for some people as tuition has escalated. If you don’t get into the school where you bought a prepaid plan, or if you change your mind and want to go somewhere else, you can usually get your money back with interest—it depends on the terms of your contract.
Is there a limited number of schools these plans can be used to pay for?
The savings plans can be used to pay for tuition, fees, books, and room and board at any institution that accepts federal financial aid. If the program you enroll in requires a computer, you can use the plans to pay for that, too.