May 29th is National 529 Plan Day. In celebration, Nichole Coyle, CERTIFIED FINANCIAL PLANNER™, breaks down the details of a 529 plan and the advantages and disadvantages of using one to save for education expenses.
You may have heard the stats – Americans owe nearly $1.75 trillion in student loan debt, spread out among about 43 million borrowers. The average 2020 college graduate in Ohio has approximately $30,605 in student loan debt. This can be overwhelming for new college graduates.
One way to help mitigate or avoid student loan debt is by starting to save for college early. But it’s not always easy. Sometimes we fall into “paralysis by analysis.” How do you know where to begin? Here are some steps to help you or your children or even your grandchildren avoid the student loan debt trap:
Define your savings goals
Consider what type of institution a child may attend (Private or State University, Tech College, etc.). This step will help you figure out how much you should save.
Research how much college tuition costs today and at what rate of inflation it is likely to increase. Then find out what funding and financing options are available.
Talk to a professional
By talking with the right people, you can find out how much you’ll need to save, how and where to save, as well as alternative funding options. There are many options to finance higher education, such as government and private grants, scholarships, government and private loans, and payment plans. Consider speaking to a financial professional who is knowledgeable about college savings options and can guide you in the right direction.
Start as early as possible
It’s never too early to think about saving, even if college is 18 years away. The sooner you start, the more you’ll have. Not only because you’ll have more time to save, but you will also have more time for your money to compound and grow.
After doing your research and speaking with a professional, compare your options and decide which option(s) is/are best for you and your family.
How Can You Use a 529 Plan to Start Saving?
A 529 Plan is a college savings account that allows you to save money for higher education. The account earnings grow tax-free, AND they are not taxed when they’re withdrawn. That means that no matter how much your money grows in a 529 Plan, you’ll never have to pay taxes on it if the funds are used for education purposes.
Some other benefits to the 529 Plan include:
Additional tax benefits
Certain states sponsor 529 Plans and allow you to deduct some of the contributions from your state income tax. In Ohio, for example, you can deduct up to $4,000 per beneficiary, per year with their sponsored plan.
You, as the owner, have control of the funds
The beneficiary (likely your child or grandchild) does not have control of the money inside the plan. This is a big benefit because you can make sure the money is used for its intended purpose. This also reduces the impact on financial aid awards because the funds are not counted as the child’s assets.
There are no income limits
A 529 Plan does not have income limits. Regardless of how much money you make, you can continue contributing to these plans. There are, however, some limits on how much you can contribute each year. If you put more than $16,000 (in 2022) into a 529 Plan for someone, you may have to pay gift tax on the contribution. If you are married, you and your spouse can each contribute up to $16,000 for each beneficiary ($32,000 total each year, for each beneficiary).
You can start saving now (even if you don’t have children or grandchildren yet)
You don’t have to wait until a child is born to start saving money for their education. Start a 529 Plan, list yourself as the beneficiary, and then change the beneficiary to a child once they’re born.
Disadvantages to a 529 plan:
Colleges consider 529 money when determining financial aid awards
Accumulated money in these accounts is included in the parent’s assets contributing to a child’s expected family contribution (EFC). However, only 5.64% of a parent’s allowable assets are used in the calculation of EFC compared to 20% of the child’s assets. While a child may receive less financial aid because they have money in a 529 Plan, there is a smaller impact compared to the funds being in the child’s name.
You’ll pay a penalty if you don’t use the money to pay for education
If you choose to withdraw money from a 529 account and use it for something other than its intended purpose, you will pay regular federal tax and a 10% penalty tax on the earnings.
Many 529 Plans are invested in different investment options, much like retirement accounts. This could allow for long-term growth that can outpace inflation and potentially help with the rising costs of higher education. While they have their advantages, investment accounts also come with a certain amount of risk. So, if a child plans to attend college in the next couple of years, a 529 Plan may not be the best option. Talk with your financial advisor about your specific situation and determine if a 529 Plan is right for you.
A 529 Plan can be a good education savings plan for many families looking to save for college. Talk with a trusted financial advisor and consider the pros and cons of each option you have. If you have questions regarding 529 Plans or any other financial matter, please don’t hesitate to contact me!
Nichole M. Coyle,
CERTIFIED FINANCIAL PLANNERTM
20333 Emerald Pkwy, Cleveland, OH 44135
Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor. Cetera is not affiliated with the financial institution where investment services are offered or any other named entity. Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.