You’ve likely heard about the growing student loan crisis – as of February 2018, Americans owe over $1.49 billion in student loans, according to the Federal Reserve.
Unfortunately, as debt has continued to rise, so has the cost of education. For the 2017-2018 school year, the College Board reports the average price for tuition and fees, not including room and board, as:
- $3,750 for a public two-year school, in-district
- $9,970 for a public four-year school, in-state
- $25,620 for a public four-year school, out-of-state
- $34,740 for a private nonprofit four-year school
Add on costs for room and board, books, and other needed items, and it becomes even harder to see a pathway to education that doesn’t require massive debt. Because of this, it’s crucial that you start planning now so that your children don’t need to carry the burden of education debt through their adulthood.
Luckily, there are savings vehicles like the 529 College Savings Plan that are designed to help you save money for your child’s education, starting in kindergarten and going through college. Additionally, a 529 plan offers tax benefits while you save, maximizing the amount you can retain overall.
If you’re wondering how you’ll pay for education in the future, it’s time to consider a 529 plan for college savings.
What Is A 529 College Savings Plan?
A 529 plan is a form of investment account that offers tax benefits so long as you use the funds to pay for educational expenses.
You can use a 529 plan to cover the costs of:
- Tuition and fees
- Computers and internet access
- Equipment for any special needs
You may also be able to use your 529 savings to pay for room and board, depending on the particular institution, whether housing is on or off-campus, and whether the student is enrolled at least half-time. In the recent tax law, changes have been made so that up to $10,000 per year of 529 plans can be withdrawn tax-free to pay for tuition at K-12 schools, whether public, private, or religious.
However, the IRS does place limitations on what is considered a qualified expense. Health insurance for students, any transportation costs, and repayments to other student loans do not count as qualified withdrawals.
How Do You Get A 529 Plan?
Specific states or educational institutions issue 529 plans. There are two different programs, one for prepaying tuition in advance, and the other being the college savings plan. Prepaid plans let you “buy” credits at specific institutions that can then be applied once your child goes to college. However, prepaid tuition plans typically have in-state residency requirements, don’t cover room and board, and their primary benefit is to allow you to take advantage of current prices in anticipation of higher ones when your child does go to school.
Instead, the college savings plans afford families a bit more flexibility when it comes to selecting educational institutions. Rather than a dollar-for-dollar way of buying education, you’re making an investment that will grow, and you’re able to use these funds to cover additional costs like room and board. Of course, because it is an investment account, you must recognize the risk that comes with it.
Fees And Additional Costs Of A 529 Plan
It’s always a good idea to prepare for any fees or costs you’ll pay with any financial product, as these can lower your overall returns. When it comes to a 529 college savings plan, you’ll want to prepare for, at a minimum:
- Enrollment or application fees
- Annual account fees
- Program and asset management fees
It is possible to reduce or remove these fees altogether if you invest in a plan in your home state, or by cutting out any middlemen like brokers, who often charge additional fees. If you have a large balance, some states will cut out these costs altogether, and sometimes you can have them waived just by contributing funds regularly and automatically to your account. Even signing-up for electronic-only communication can help you save on extra costs in some states.
529 Plans And Your Taxes
You won’t be responsible for paying tax on your 529 plan earnings or any withdrawals so long as they are for a qualified educational expense. However, you can technically take out funds whenever you need to, they’ll just be subject to potential penalties and taxes.
When you contribute funds to a 529 plan, you are doing so post-tax. Any contributions are not deductible on the federal tax level, but over 30 different states allow deductions or offer credits on the state-level. However, there are also restrictions on what state the institution can be in when it comes to these credits, so you may be limited to your home state’s plan if you’re looking for those benefits.
When funds aren’t used for qualifying expenses, you’ll be on the hook for both federal and state taxes, as well as a 10% federal tax penalty on anything that you’ve earned.
What Happens When You Don’t Use A 529 College Savings Plan?
Circumstances change, so what if you’ve saved to send a child to college through a 529 plan and they have something else in mind? Since the money is still your savings, it’s yours, although you may have to pay income tax and penalties on your earnings, meaning you may not have as much left as you think. If your child decides to attend a U.S. Military Academy or receives a tax-free scholarship, you may be able to have fees waived.
You can also change the beneficiary on the account from your child to someone else. This could be another child or qualifying family member who wants to attend school, or even a change to your name if you’d like to further your education. You can also maintain the account as-is in case a child would like to attend graduate school.
When it comes to costs like college, your best bet is to prioritize your savings now. If you’re looking for more ways to save money on future expenses for education, get expert advice sent straight to you. Sign up for our newsletter now!