Saving for College: A 529 Plan Q&A

Student loan debt. Did your stomach just drop? Did your brow furrow with a sudden onset headache? Did you feel a shiver down your spine? If so, you probably have debt thanks to student loans you took out to attend college. The average student loan debt in Tennessee is just over $26,000 and if a student goes on to attend graduate school, the numbers will just keep going up. Debt is that ever-tightening noose around the neck and it’s not a noose I want my son to wear.

But let’s be real, how many of us can really afford the high price of higher education? Let’s use the obvious Marble City institution as an example. The University of Tennessee currently posts tuition at $6,362 per semester for in-state residents. The tuition rate does not include the facilities fee, technology fee, library fee, transportation fee, books and supplies, or any number of housing expenses that are inevitable. “At the current published rates, an estimated total tuition, fees and living expense price for a 4 year bachelor’s degree at The University of Tennessee is $118,504 for students graduating in normal time (CollegeCalc).” Oy!

But an education is a valuable thing so thousands of students pursue the degree and saddle the debt.

My husband and I were very fortunate to have generous parents who could afford (albeit scarcely) the tuition for our undergraduate degrees. We both walked across the stage with a degree and debt free. I knew as a student and even more so now, that this was not the norm and now 11 years later, most of my friends are still paying for the degree they earned. It’s  terrible reality.

Which is why when the organization I work for recently added a 529 plan to our non-insurance benefits options, I walked straight into our CFO’s office and gave him a high-five (because hugs are inappropriate). For anyone who doesn’t know, a 529 plan is a college savings fund with incentives and other benefits that make it a little easier to save for college for a child or grandchild.

Since I’ve been down this road already and have learned a few things, here are just a few of the questions you should asked before starting a 529 plan:

Are there tax benefits/incentives for funds contributed and withdrawn from a 529 plan?

The good news is the distributions from the account for eligible education expenses are not subject to federal or state income tax and the earnings grow tax-free. The bad news, if it’s really all that bad, is that the contributions to the account are after-tax and are not tax deductible. Because 529 plans are state-sponsored, some states add incentives to compete for your business over another 529 plan.

Who can start a 529 plan?

Literally, anyone and everyone. You don’t have to be a parent or even a guardian of the beneficiary. Here’s looking at you loving aunties!* Parents, grandparents, relatives and friends over the age of 18 can start a 529 plan.

*Unless you are planning to start a 529 plan with better benefits, plan options, or lower fees, or you are an expert in investments, it is probably best to ask the beneficiary’s parents if a 529 plan already exists for their child. This way contributions are consolidated which may make it easier for the beneficiary to withdraw. Also, it could make family reunions less awkward if you’re all on the same team.

Is there a limit to how much I can contribute?

What are you made of money?? Ok, yes, there are limits to how much can be contributed. Contributions to any particular child’s 529 plan cannot exceed $14,000 per year* without being subject to federal gift tax but if you have 3 children and 3 separate 529 plans, you can contribute $14,000 to each plan in a year.

*There is an exception in the IRS codes for larger contributions. See IRS Form 709,  Schedule A: Computation of Taxable Gifts.

Can anyone contribute to the fund?

Ok, so this is the Lorelai Gilmore question. So what if your parents are Richard and Emily? Can they contribute to your child’s college fund? The good news is YES! Once you’ve started a formal college savings plan (even if you don’t use a 529 plan), it’s a good idea to let parents, grandparents, relatives, godparents, or others who might be interested in contributing to your child’s college education. Play it cool. This isn’t a GoFundMe campaign but financially strategic adults will find this helpful for estate planning and gift-giving. Some states have pre-made announcements you can download, print, and send for special occasions in your child’s life.

What if my child (invents the Internet and) decides not to attend college?

Dare to dream! The reality is that a college degree isn’t for everyone. It can be hard to hear that especially for parents with advanced degrees of their own. As more and more American students are earning bachelors degrees, the tide could shift in two different directions: (1) the college degree becomes tomorrow’s equivalent of a high school diploma and sets the baseline even higher OR (2) the college degree becomes so common that it is no longer the divining rod for recruiters and instead emphasis is placed on apprenticeships or demonstrated competencies.

Even if 15 years from now, the college degree is still the standard expectancy for our children, there may be any number of reasons your child does not attend. And that’s ok! You just need to know what the options are if your 529 plan’s intended beneficiary doesn’t attend an eligible institution.

First of all, you can change the beneficiary of your 529 plan. For example, if your first born has a 529 plan valued at $25,000 (bravo!) but she is drafted by the Charlotte Sting right out of high school, you can transfer (and rollover) funds into the 529 plan of another child in your family. You can also hang on to the funds for your oldest just in case things don’t work out in the WNBA.

Can I only open a 529 plan through my employer?

Nope! Your employer may offer a 529 plan with options to auto-deduct from your paycheck after taxes for your convenience but you can start a 529 plan on your own. You also don’t have to stick with the Tennessee 529 plan but again, there could be added incentives for doing so. For more info on Tennessee’s state 529 plan, check out TNStars College Savings 529 Program.

So what’s the downside?

Well, somebody doesn’t believe in a win-win scenario. Ok, there are fees associated with administration of a 529 plan. Also, if you decide to distribute the funds for your child’s start-up company rather than for a qualified educational institution, the funds will be subject to taxes and penalties. Uncle Sam can be a jerk.

Another kick in the wallet is that the 529 plan is an investment in the stock market and the value of the fund will rise and fall with market performance. The value of the fund can also impact the amount your child can receive in financial aid.

The long and the short of it is that you have to make the best decision for your family and the good news is that you can diversify your options! Just because you have a 529 plan doesn’t mean you can’t also set aside money in a mutual fund to fund your child’s endeavors. You may also think, it’s good for my kid to work for what they get and I don’t owe them a college education. That’s fine too. Why not tell them early about the benefits of saving for college and starting their savings plan?

**One more thing to consider (but not count on) is the Tennessee Promise which allows graduating seniors in Tennessee to apply for 2 years of paid tuition to a community college or technical school. Restrictions apply and it’s a new program so the jury is still out.

 

 

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