Three Numbers to Remember: 5 – 2 – 9. Every year we hear that private and public college education costs are rising. And now we hear that college graduates’ debt loads are climbing right along with tuition prices. (According to the 2019 student loan debt statistics the average undergraduate who borrows leaves school with about $30,000 in debt.) The COVID-19 Pandemic added more fuel to the fire for those asking “Is it worth it to go to college?”. College enrollment sank 25% among graduating high school seniors in 2021. Most chose to delay their college plans due largely to their parents or guardians being less able to provide financial support due to the pandemic.
A new era?
To many parents and grandparents, it seems like everything is changing. A four-year degree has been as much a part of the American dream as home ownership, and yet today’s youth is facing a shrinking or stagnant economy with more employment openings in “low skilled fields.” High school graduates have to weigh the possibility of incurring tens of thousands of dollars worth of debt to earn a four-year degree that may offer very little in terms of immediate earning potential.
But not so fast - the Bureau of Labor Statistics estimated that those with a bachelor's degree earned almost $645 more per week than those with only a high school diploma in 2021. A college education still provides key opportunities and employment advantages, so the question remains - how to keep up with rising tuition and fees?
As always, savings plans can save the day.
In keeping with the new economic reality, there are no quick fixes to the college tuition challenge, but there are options for anyone interested in helping a family member pay for college. One option you should consider is a 529 Plan.
What is a 529 Plan? First created in 1996, these savings plans are offered in all 50 states and Washington, DC. Generally, you can open and contribute to any state plan you wish – regardless of where you live, or what state the student will attend college. Note that your state of residence may offer tax savings incentives to invest in their sponsored state plan, which is an important factor when comparing plans.
There are two types of 529 plans: prepaid and savings plans.
Prepaid tuition plans allow parents, grandparents, and other interested parties to purchase future tuition at today’s rate. The pre-paid 529 program will then pay the future college tuition of the beneficiary at any of the state’s eligible colleges or universities (or comparable payment to private or out-of-state institutions).
Savings plans enable participants to save money on behalf of a designated beneficiary. The plans offer various investment options ranging from fixed income to equities.
In addition to serving as a savings vehicle specifically for higher education tuition and associated costs like room and board, 529 Plans provide key advantages:
- Although your contributions are not tax deductible on your federal return, the growth experienced during the life of the plan is deferred – with tax-free distributions when used to pay for qualified higher education expenses. Some states (like New York and Vermont) even offer residents a deduction or credit on state income tax returns.
- Once the plan is established, you will not receive any 1099s until you start making withdrawals. Dependent on the state plan, there are limits to how much an individual can contribute to a 529 account, but these limits can be as high as $305,000.
- These plans provide a vehicle to transfer money from your estate, while still maintaining control of the account and positioning the money to eventually be spent on higher education. If you have established the account for a child who later decides to skip college, 529 savings plans allow you to change the beneficiary to an immediate family member of the original beneficiary.
- For gift and generation-skipping tax purposes, contributions are treated as a gift to the named beneficiary. As of 2021, 529 contributions qualify for the $15,000 ($30,000 for couples filing jointly) annual gift tax exclusion. Should you wish to contribute over $15,000 or prepay up to $75,000, you are allowed to treat these savings as if they were made over a five-year period for gift tax purposes. This may be a very attractive option for those looking to lower their estate tax liability sooner rather than later.
- Another big advantage of 529 Plans? Since 2014, Unified Gift to Minors Act assets held within a 529 savings plan are no longer included with other student-owned assets in the formula for determining the “expected contribution” towards college costs. What used to count against aid eligibility at the rate of 35 percent is now calculated at no more than 5.64 percent of value for parents holding the account, or not at all if the account is owned by grandparents.
- Changes due to the 2017 Tax Cuts and Jobs Act Changes
- 529 plans are now eligible for use of up to $10,000 per year in K-12 tuition expenses for private and religious schools. Deduction limits vary by state and options may be limited to your home state's plan. Be sure to check with your tax advisor on your state's rules.
- Existing 529 accounts are now allowed to be rolled over into 529 ABLE accounts. These accounts can help those living with disabilities save for education and other living expenses without forfeiting eligibility for public benefits like Medicaid. ABLE account qualifying expenses include the traditional college expenses, as well as job training, financial management, and healthcare.
- Recent changes due to the 2020-2021 Cares Act and Secure Act
- Up to $10,000 from a 529 plan can be used to pay back student loans
- 529 Funds can be used to pay for apprenticeships
- Removal of the "Grandparent Trap" where grandparents' 529 distributions counted on FAFSA as a gift to the child. This allows more saving by grandparents without a Financial Aid penalty to the child.
Straightforward Savings.
Although college costs are beyond your control, these educational savings vehicles provide you an easy way to prepare your family’s student(s) for the challenge of higher education funding. Once you review the 529 plan options and decide which is the best fit, enrollment is very easy and automatic deposits begin to build that "education nest egg."
Resources
Student Loan Hero: A Look At the Shocking Student Loan Debt Statistics for 2019
https://studentloanhero.com/student.loan.debt.statistics
Bureau of Labor Statistics
https://www.bls.gov/careeroutlook/2018/data-on-display/education-pays.htm
IRS.gov - Guidance on Recontributions, Rollovers and Qualified Higher Education Expenses under Section 529
https://www.irs.gov/pub/irs-drop/n-18-58.pdf
IRS.gov - Tax Highlights for Persons With Disabilities
https://www.irs.gov/pub/irs-pdf/p907.pdf
Bureau of Labor Statistics – Usual Weekly Earnings Summary
https://www.bls.gov/news.release/wkyeng.nr0.htm
CNBC - 25% of students postponed college during Covid, some indefinitely
https://www.cnbc.com/2021/04/16/college-enrollment-sank-due-to-the-covid-pandemic.html
NY Times - New Law Expands Uses for 529 College Savings Accounts
https://www.nytimes.com/2020/01/10/your-money/529-college-savings-accounts.html
Forbes - A New Change Coming to 529 Plans
Adam Robert, CFP® of Clute Wealth Management in South Burlington, VT and Plattsburgh, NY, an independent firm and registered investment advisor that provides strategic financial and investment planning for individuals and small businesses in the Lake Champlain Valley region. The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations. For a list of states in which we are registered to do business, please visit www.clutewealthmanagement.com.
Securities offered through LPL Financial, member FINRA/SIPC. Clute Wealth Management and LPL are separate entities.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.