Every year in May, families across the country attend high school graduations. In a ritual that marks a rite of passage for millions, students receive their high school diplomas and embark upon the next stage of their lives. For many of those graduates, the next stage involves the pursuit of a college degree or certificate of proficiency.

But the benefit of education comes with a price tag that is steadily increasing and can be a huge barrier to success. As public funding in higher education has declined, student loan debt has increased. Today’s graduates are leaving college with an average student loan debt of over $26,000, and many of those students have accumulated debts of $50,000 to $100,000 or more. Nationally, student loan debt has exceeded $1 trillion, surpassing credit card debt. Plus, nearly 15 percent of borrowers have delinquent student loan accounts totaling about $85 billion.

To avoid excessive student debt, students and families are well-advised to educate themselves about available resources for students, cost cutting strategies to keep expenses down, and a disciplined savings strategy to help offset future cost and avoid over-reliance on debt.

Gaining rapidly in awareness and popularity are state-run Qualified Tuition Programs, authorized under Section 529 of the Internal Revenue Service Tax Code and popularly known as 529 Plans. The plans offer several advantages including:

  • Federal and state tax-deferred growth
  • Federal tax-free earnings if the money is used for college
  • Favorable federal gift tax treatment
  • Favorable federal estate tax treatment
  • State tax advantages
  • Availability: Section 529 plans are open to anyone, regardless of income level. And you don’t need to be a parent to set up an account.
  • Professional money management for college investors who are too busy, too inexperienced, or too reluctant to choose their own investments.
  • Simplicity: Most plans offer automatic payroll deduction or electronic funds transfer from your bank account.

A key feature of 529 Plans is that deposited funds are controlled by the plan owner (typically a parent or grandparent, but anyone may open a 529 Plan), who selects a plan beneficiary for whom the funds are intended to benefit (typically a child or grandchild, but a Plan owner may name anyone as beneficiary). This allows the Plan owner to ensure the funds are used for the purpose of education. Should the beneficiary decide not to go to college, the owner has the option of selecting another beneficiary from within the family. Or, the owner can even name themselves as beneficiary and use the funds to further their own education.

Consumers may shop for a wide variety of 529 Plans sponsored by other states. But it is important to consider your home state’s offerings to make sure you aren’t missing out on additional tax benefits.

Arkansas offers two 529 Plans through the Arkansas College Savings Plans: the GIFT Plan, a direct-sold plan that gives consumers several mutual fund options offered by the Vanguard Group; and the iShares 529 Plan, an advisor-sold plan available through a national network of Registered Investment Advisors who offer clients a variety of options through a wide selection of exchange traded funds (ETFs) managed by BlackRock Inc. Both plans include the option to place funds in an FDIC insured account administered through Sallie Mae, called the Sallie Mae High-Yield Savings Account.

Arkansans who invest in one of the state’s 529 Plans may take advantage of a state income tax deduction which allows contributors in one of the state’s two plans to deduct up to $5,000 ($10,000 for a married couple) from their annual income for state tax purposes, as well as state-tax deferment on growth and tax-free earnings for qualified higher education distributions.

Additionally, Arkansas residents with household incomes below $60,000 who are invested in a GIFT Plan 529 naming a dependent child as beneficiary may qualify for matching funds up to $500 a year for up to five years. Named the Aspiring Scholars Matching Grant Program, these matching funds are intended to provide lower to moderate income Arkansans with additional leverage to help maximize their children’s potential.

Although starting early holds the potential for greater growth of savings, it’s never too late to start. Even modest amounts saved can make a big difference, and families should not allow the overall cost of a degree to act as a barrier. Numerous economic studies and analysis of statistics gathered from a variety of sources show that, although the cost of higher education is considerable, it can easily be eclipsed by the cost of a lack of education.

Persons interested in any offerings of the Arkansas College Savings Plans are advised to read the Program Description (PD) for the specific plan they are interested in. Contact the Arkansas College Savings Plans at 682-1406 to request a hard copy via U.S. Mail. These descriptions contain important information regarding each Plan, including potential risks and any restrictions pertaining to accounts opened under these Plans. Information regarding benefits and eligibility requirements for ASMG is available at www.Arkansas529.org. With the exception of the FDIC-insured Sallie Mae High Yield Savings Account, investments in the Arkansas College Savings Plans are not guaranteed and can lose principal. Additional information including answers to Frequently Asked Questions and financial education resources may be found at Arkansas529.org.