Parents and grandparents who are contributing to 529 plans, post-secondary education savings plans with tax benefits, may get an unexpected lift in the form of state matching grants. Similar to a workplace matching contributions to a 401(k) plan, states may match contributions to 529s—up to 200 percent of the amount that the individual contributes. Twenty-three states participate; typically, the annual match ranges from $300 to $500, says Michael Fitzgerald, chairman of the College Savings Plans Network, which represents the 529 plans of all 50 states.
If parents or grandparents contribute $300 per year for five years to a plan whose state matches funds at 100 percent, they'd accumulate $1,500 in matching grants. While the plan could be opened by or contributed to by anyone, it's important to note that there may be income restrictions for the matching funds, which are based on the parents' or legal guardian's Adjusted Gross Income (AGI), says Arkansas 529 Plan Project Coordinator Dale Ellis. Residency restrictions may also apply.
Carol Fulco, director of Louisiana's 529 plan, says she has received E-mails from parents letting her know that the combination of matching grants and state tax deductions is the reason they are able to send their kids to college. Fulco's state matches up to 14 percent per year for contributions made to individual 529 plan accounts.
Here are four questions to ask 529 plan administrators about states' matching grants:
1. How frequently are grants awarded? States differ widely on how often grants can be distributed. "Some grants are one-time-only matches that are made by the plan when the account is opened; others are made on an annual basis up to the match limit," says College Savings Plans Network's Fitzgerald. For instance, Maine offers $500 grants, called Alfond Grants, to start 529 plans for babies born in the state or who are moving to the state before their first birthday.
Older children qualify for a $200 grant when their plans are opened, as long as a $50 opening deposit is made. Nevada offers annual grants of up to $300 per year in matching funds for up to five years for children who receive their first grant at age 13 or younger. A 13 year old could earn four more matching grants in subsequent years.
2. What are the residency restrictions? "All plans require either the beneficiary or the contributor to be a resident of the state that is offering the program and grant," Fitzgerald says. Some require both. For example, Nevada requires the owner of the plan and the person benefiting to be residents of the Silver State. On the other hand, Maine allows an individual from any state to open an account for a child living in Maine.
[See why to consider purchasing another state's 529 plan.]
3. What are the income restrictions? It varies from state to state. For example, Maine doesn't have an income restriction for an initial grant. Louisiana gives a smaller match at the $100,000-and-above adjusted gross income (AGI) level. Residents of Arkansas with an adjusted gross income of $30,000 or less qualify for the Aspiring Scholars Matching Grant Program at a 2-to-1 match rate. For instance, if someone contributes $200, they'd receive $400 in matching contributions in one year.
If someone makes under $60,000 AGI, they'd earn matching grants under that program at a 1-to-1 rate. The same contribution of $200 would be matched with $200. The award limit is $500 per year for five consecutive or nonconsecutive years, totaling $2,500.
4. Can adults and children qualify? Many states limit grants to accounts that benefit minors, and some states limit the age of eligible children. Arkansas grant recipients, for example, can enter the grant program before their 19th birthday and receive additional grants before their 24th birthday.
Families with several children can earn matching grant funds for each child, says College Savings Plan Network's Fitzgerald. However, in states where independent students also qualify, such as Louisiana, adults can earn matching funds for their own education while also contributing to plans for their children.
Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.