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Grandparents and parents should read the fine print of college savings plans.

PAMPLIN MEDIA GORUP - Julia says check the details of student savings plans.

With college costs, out of reach for many, starting a 529 college savings plan for your child or grandchild may make sense.

That is, if you are willing to dig into details of how 529 plans work.

In a nutshell, saving inside a tax-advantaged 529 is a big plus because earnings (dividends) accumulate year-after-year, tax free. But sorting out rules for distributing accumulated funds can be tricky.

For example, distribution applies differently if a student or parents own a 529 rather than if a grandparent owns the fund.

First the pluses:

Savings grow faster inside a tax-advantaged 529. The Oregon College Savings Plan program offers a chart showing how with an initial investment of $5,000 and an additional $1,200 annual contribution over 18 years would result in total savings of $54,958 inside a 529. A similar investment strategy outside a plan would result in just $46,788 because of the annual tax hit.

Savings inside a 529 may be used at any accredited university, college or vocational school, nationwide. Distribution from a 529 can go toward more than just tuition but can be used to pay for books, room and board, computers, fees and supplies.

As a parent or grandparent, you own the 529 fund. If your child or grandchild does not need the money or their goals change, you can designate a new beneficiary penalty-free so long as they are an eligible member of your family. To kick-start a 529, you can give up to five years' worth of gifts at one time.

"It's my suggestion that families look at 529 plans as possible options — reading all plan details, of course — instead of assuming that having such a plan might limit the student's financial aid eligibility," said Michael Johnson, director of the Office of Student Financial Aid & Scholarships at Portland State University.

Most students, he said, who apply for financial aid will finance higher education using a combination of loans and savings. If the 529 is in the student's or parents' name, the value of the 529 is reported as parents' assets on the student's application for a Free Application for Federal Student Aid (FAFSA). For financial aid eligibility purposes, the value is assessed at a low rate for parent assets of about 5.4 percent. That compares to 20 percent for dependent student assets.

However, if the plan is held by a grandparent the funds are treated differently. Any distribution from a 529 held by a grandparent (or other person) is considered part of the student's untaxed income for the year used and could affect the student's future Expected Family Contribution (EFC). This "income" could mean a reduction in eligibility for need-based aid two years later because of how FAFSA collects income information.

Despite these complexities, a 529 may be a good way to go, said PSU's Johnson.

"Eligibility for federal Pell Grants, which a lot of students hope to get, is limited to the neediest one-third or so of undergraduate students, nationwide," he said. "I think it is always best to have and control your own funds including a 529, for example, rather than depend on funds you may or may not receive from institutions or outside sources where policies and rules change frequently," he said.

As for grandparents, estate-planning experts at Fidelity Investments, recommend that funds from a 529 plan owned by a nonparent/grandparent be used in the last year of college, after the last financial aid forms are filed. That way the 529 "income" won't affect need-based aid.

College savings 529 plans are operated by states or educational institutions and are named for Section 529 of the IRS tax code created in 1996.

In Oregon, the Oregon College Savings Plan reports an overall annual return since inception of 7.7 percent. Managed by TIAA, the Oregon funds annual management fees range from 0.28 percent to 0.60 percent.

Julia Anderson writes for women about money and retirement at: sixtyandsingle.com.

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