I woke up recently to birds chirping and sun beaming through my bedroom window. Thoughts of warmer weather and the end of the school year drifted through my head. All of sudden the sun went behind a cloud and the sound of birds was replaced with screeching breaks. No, there wasn’t an accident outside my door, that was my brain jolting awake screaming “oh my gosh, your eighth grader’s school year is almost over…that means next year you have a high schooler…and that’s only 4 short years away from graduation and then college and…oh lord how are we going to pay for college?!?!
According to the most recent report by the National Center for Education Statistics the average cost of a 4 year institution, including room and board, was $32,595 as of the 2016-2017 academic year. But wait…that’s per year folks! That means the average cost to send our little darlings away to school for 4 years will total up to over $130,000. Now if you happen to have a little genius on your hands that decides to go to a private non-profit school the average per year there could be upwards of $48,865 or a whopping $200K. Excuse me while I faint…
Just kidding! Well, about the fainting part, I still can’t believe my tiny little 6lb 12oz 22 inch long bundle of joy is now taller than me and entering high school in September. Anyway…I’ve been planning for this moment since she was born with a Section 529 College Savings Plan. After all, I don’t want my 26 year old living with me because she can’t afford both rent and a student loan payment! There are some myths I’ve heard about 529s that you may have heard as well. Let me dispel the top 4 for you and encourage you to get that 529 plan going today!
Myth 1: If I open a 529 plan my child won’t get financial aid.
Truth: Every year when you fill out the Free Application for Federal Student Aid (FAFSA) your expected family contribution will be calculated by looking at income and assets of the parents and child. Expected contribution from parental assets (bank accounts, CDS, mutual funds, 529s, etc.) will range from 0% to 5.64%, while the expected contribution from a child’s assets is 20% (anything in their name in bank accounts, CDs, savings bonds, and UTMA accounts). Did you catch what was in the parental parenthesis right there? A 529 is not the property of the child, it is the property of the parent! So the expected contribution from parent owned 529s will be a maximum of 5.64% not 20%, ergo allocating assets to a 529 plan means your child could actually qualify for more aid than if you allocated those same assets to a savings bond or UTMA account (property of the child).
Myth 2: If my child doesn’t go to college, I lose the money in the 529 plan.
Truth: A 529 is a very flexible investment vehicle. Earnings are tax deferred and withdrawals are free from federal tax if used for qualified education expenses and this is where the confusion comes in. If a withdrawal is not used for qualified education expenses you don’t lose that money, but the earnings portion of the withdrawal does become taxable as income.
There are so many options on how to spend 529 funds that this doesn’t need to happen! When people think of college many think of a traditional brick and mortar school that you go away to for 4 years. However funds can be used to pay for tuition, fees, books, and supplies at almost any accredited post-secondary American institution including trade schools and graduate schools. If you are curious to know if a certain school is accredited you can search the US Department of Education’s Database of Accredited Postsecondary Institutions and Programs (aka DAPIP, which is less of a mouthful) So don’t worry, if little Tommy or Susie decide they want to bypass State U in pursuit of a career in HVAC installation or massage therapy you will most likely still be able to fund that path with your 529.
Now let’s say Child #1 decides after high school graduation that they will not pursue any higher education. All is not lost! When you name a child on a 529 plan they are named as beneficiary, you are the owner. As the owner you have a right to change that beneficiary at any time. For instance you can change the beneficiary to Child #2, (the one you have secretly been pinning your hopes on all along), or even to yourself to finally pursue that Master’s Degree or take a class in The Art of Ceramics at your local community college. Or just let that account sit there. There isn’t an age limit on 529 plans, and maybe Child #1 will come back around at the age of 30 and finally decide they want more than their minimum wage job but need some sort of training to improve their prospects.
Myth 3: My child can only go to college in the state where the 529 plan is sponsored.
Truth: Many states sponsor 529 plans and you can open one with whichever you chose. You do no need to be a resident of the state with which you open the 529 nor does the child have to go to school in that state. You should however carefully weigh the options of your own state 529 plan with that of other states as there may be certain tax benefits for opening a plan within your state of residence.
Myth 4: My child is in high school so it’s too late to open a 529 plan.
Truth: As I mentioned above, there is no age limit on 529 plans. It is never too late to put money away for your child’s future. Contact me today to discuss any further questions you may have and start your child on their path to success!