The 101 on 529 Plans
Could 529 be the magic number to paying for higher education?
These days, it may seem like saving for college is close to impossible, no matter how much of a jump start you get. The cost of attendance at both public and private colleges across the United States is increasing at an alarming rate — at an even higher rate than inflation.
According to a research report by the College Board, a nonprofit college resource, “Between 2009-10 and 2019-20, published in-state tuition and fees at public four-year institutions increased at an average rate of 2.2% per year beyond inflation.”
In terms of dollars, the report said these increases had the following impact on wallets:
Between 2009-10 and 2019-20, average published tuition and fee prices rose by $670 (in 2019 dollars) at public two-year colleges, by $2,020 at public four-year institutions, and by $6,210 at private nonprofit four-year colleges and universities.
If the possibilities of endless student loan debt have you reconsidering the value of higher education, whether for yourself, your child, or another family member or loved one, there are savings program options that you can explore.
The 411 on the 529
A 529 plan is a savings account sponsored by states and used to pay for education. Section 529 was added to the tax code 1996 as a means to help Americans save for college expenses, and was expanded in 2017 to allow for the option to pay for private elementary, middle, and high school, as well.
A 529 plan is similar, in some ways, to a 401(k) account in that it is a tax-advantaged account meant to accrue money through contributions and investments. Unlike 401(k) contributions, which can be made with pretax income dollars, the federal tax-free benefits of a 529 plan are only on the investment earnings the account generates.
While federal tax laws don’t currently impose a specific annual contribution limit on 529 plans, the collective balance of a designated beneficiary’s accounts “cannot exceed the expected cost of the beneficiary’s qualified higher education expenses,” according to website savingforcollege.com.
On the other side of the coin, state tax benefits — like tax deductions — and contribution limits vary from state to state, so whether you reside in New York or Arizona, you will have to do some research to figure out the state tax laws and how the playing field works where you live.
529, will it make you feel fine?
Using a 529 plan as a college savings account provides an alternative to relying on student loans, which can accrue interest very quickly. With a 529 plan, the interest is working in your favor, since it’s earned.
“Because every dollar a 529 plan generates is a dollar that does not have to be borrowed and repaid with interest by a young person, it allows college graduates to avoid becoming a part of the $1.49 trillion student loan debt crisis,” advises Greg Klingler, director of wealth management at the Government Employees’ Benefits Association.
Klinger also champions the ease with which one can start contributing to a 529 plan. While you probably will not be able to get employers to match contributions to these plans like they do with a 401(k), there are not too many restrictions beyond being required to spend the money on approved educational expenses.
There is also a great deal of flexibility when it comes to whose education the plan will cover. The account owner doesn’t necessarily have to be the eventual college age student, or even the parent of the student.
“One of the biggest advantages of a 529 plan is that anyone can open and make contributions to one for a child,” says Robert Farrington, founder of The College Investor. “You do not need to be the parent of the recipient. In fact, you can even open them for yourself. As long as they are a U.S. citizen or resident alien, anyone can receive the benefit of a 529 plan.”
What if the college age person meant to receive your 529 money receives a scholarship to cover the cost of tuition? Worry not! You can also spend the money on additional qualified expenses, like housing and books.
Other college savings options
There is not really a downside to opening a 529 plan if you are able to access one through your state or possibly even a different state. But they are not the only options available. Besides supplementing your 529 college savings with loans if necessary, you can consider other savings and investment options like a Coverdell Education Savings Account.
“The money in a Coverdell ESA can be invested into stocks, bonds, or mutual funds,” explains Stephanie Bousley, student debt and personal finance consultant. “Thus if you (or someone you know) know about investing, the money can grow a lot faster. With 529 plans, most states allow you to choose between two or three investing portfolios. You can reallocate the money within the portfolio you choose, but only twice a year.”
Coverdell ESAs can also be opened through various financial institutions, rather than through states. That means you will have to be more careful about which institution you choose to trust, but it may allow more flexibility.
There is no silver bullet to paying for college. By doing your research and considering all the possibilities, you will have a better shot at finding a means to handle the costs.
Short-term options to help cover your costs
While college savings accounts that come with the benefit of tax breaks may be a comforting option for those who have time to hit their college savings goals, this type of investment plan may not be for everyone.
If you need a more immediate solution to covering higher education costs, there are financial aid options that are available, such as scholarships, loans, and work-study opportunities. Here are a few articles to get you started:
- 4 Must-Know Ways to Help Pay for College
- How Financial Aid Works: A Complete Guide
- Everything You Need to Know About the FAFSA: 2020-2021
Stephanie Bousley is a student debt and personal finance consultant based in Los Angeles. She holds bachelor’s degrees in international business and psychology from the University of San Francisco and went on to complete an MFA in film production from New York University’s prestigious Tisch School of the Arts. After grad school, she was nearly $200,000 in student loan debt. Three unpaid internships in the film industry later, the debt snowballed to $286,000. Wanting to conquer her student debt, Stephanie read several personal finance books but became frustrated at what she perceived as their patronizing voice, and failure to address the complex personal issues that accompany financial difficulty. Having dealt with her own financial challenges, depression, and a change in careers (solely due to her debt), she chose to take a more holistic approach to personal finance and became increasingly interested in helping others do the same. Her upcoming book will be published by Familius Publishing in early 2020. You can find her on Twitter at @TheDebtRebel.
Robert Farrington is the founder of The College Investor, which he started to help millennials get free of their student loan debt and start building wealth for their future. He has had a passion for investing and all things related to personal finance for as long as he can remember. When he was about 13, he even made enough income to pay taxes. While in college and graduate school, he realized that most people were oblivious to investing and personal finance, even MBA students, so he ended up helping many of his peers. It was apparent that the number one dilemma holding back millennials from investing and building real wealth is student loan debt. This led him to write “Student Loan Debt: Getting in Smart, Getting out Painlessly.”
Greg Klingler has been the director of products and member services at GEBA since 2010 and has more than a decade of licensed experience as a financial advisor. He has been working exclusively with state and federal employees since 2003, assisting them in maximizing their retirement plans. He has been a managing producer since 2005, holding a number of titles including mentor, branch manager, compliance officer and director. He specializes in retirement planning using pensions, survivor pensions, employer sponsored insurance, and retirement plans as well as portfolio analysis, estate planning, and college planning.
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