It's College Savings Month. Do You Know Where Your 529 Plan Is?

Make the college tuition sticker shock a little less shocking

September is College Savings Month, an appropriate time to think about education costs and how the average person can prepare to send their kid(s) off to the university of their choice without burying themselves in mountains of debt.

In this post, we'll talk about how 529 plans can help, but first let's start with a broad picture of the student loan landscape.

According to the U.S. Federal Reserve and the Federal Reserve Bank of New York:

• Americans are carrying $1.56 trillion in total student loan debt (that's $521 billion more than the total U.S. credit card debt)
• 44.7 million Americans have college debt
• 11.5 percent of student loans are 90 or more days past due or in default
• The average monthly student loan payment is $393
• The median student loan payment is $222

Among those who graduated in 2018:

• 69 percent of them took out student loans
• Their average debt was $29,800
• 14 percent of their parents took out PLUS loans at an average of of $35,600

Sources: Student Loan Hero; Savingforcollege.com; U.S. Federal Reserve

How 529 Plans can help families prepare for college costs

College Savings Month is a great time for parents to get familiar with a 529 College Savings Plan. The commonly used college savings plan offers parents, and their college-bound kid(s), tax-free withdrawals to pay for college.

Here’s what you need to know about a 529 College Savings Plan:

• Sometimes called “qualified tuition programs,” 529 Plans are vehicles that allow you to save for the higher education costs of someone else.
• Family members, friends or anyone else can establish a 529 Plan to benefit a future student.
• 529 Plans are provided by a state, agencies of the state or by educational institutions themselves.
• Money invested in the plan accumulates on a tax-deferred basis and distributions used for higher education expenses are tax and penalty-free, as long as the funds are used for approved education expenses. 

That last point is the key. The tax benefits of 529 Plans are only applicable if the funds are used to pay for approved education expenses. There are nuances to these plans in different states, so talk to your financial advisor before opening an account.

What are qualified expenses for a 529 Plan?

529 Plans have to be used cover qualified expenses. There are actually many applications for the funds in these plans. You can use them to pay for undergraduate or graduate tuition, trade or tech schools, cooking schools, and some accredited schools abroad. Funds can also be used for room and board, books and other fees.

What about using a trust instead?

Some parents consider creating a trust for college expenses. But be aware that  trust funds may not be an effective way to shelter money from the financial aid process, which is concern if your student will apply for such aid. Trust funds can be counted as assets during the financial aid process, affecting your child’s eligibility for aid. A potential work around could be established if the trust was restricted to withdrawing just the principal for the beneficiary.

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