We’ve all seen the headlines:
“Cancellations, Opt-Outs, and Virus Cases Put Heat on College Football” (The New York Times)
“5 Ways COVID-19 Will Change Higher Education Forever – and How Colleges Can Adapt” (USA Today)
“On Campus But Under Lockdown — a Day in the Life of a College Student During Covid-19” (CNBC)
COVID-19 is transforming the college experience – from the classroom to the sports field to socializing. In a recent article The Chronicle of Higher Education explored the eight types of reopening that colleges and universities are considering in light of ongoing risks due to COVID-19:
- fully in person
- fully online, no students on campus
- fully online, at least some students allowed on campus
- primarily online, some courses in person
- primarily in person, some courses online
- to be determined
However, while questions remain about what the college experience will look like in 2020, one thing hasn’t changed: you will still have to pay for it, and according to US News and World Report, the average cost of college tuition and fees last year was between ~ $10,000 - $37,000/year.
While some people are able to fund college costs directly from cash flow, many rely on a combination of student loans (federal or private), gifts, and savings strategies including college savings plans such as 529s or Coverdell Education Savings Accounts.
When it comes to putting money aside for a child's future education, 529 saving plans are one of the most effective savings vehicles. The primary benefits are tax-deferred growth (just like an IRA), tax-free withdrawals for qualifying education expenses, and depending on what state you live in, contributions to that state’s plan may be tax deductible. Additional benefits include anyone can own and contribute to a 529 savings plan, the funds can be self-managed, and many 529 plans offer age-based portfolios which provide for more conservative investments as your child gets older and is closer to attending college.
One noteworthy feature of 529 accounts is how they are titled. Similar to UGMA/UTMA accounts, 529s are set up as a beneficiary arrangement which means the money is never titled in the minor’s name but is to be used for their benefit. This way the owner, usually parent or grandparent, maintains control of the money. The 529 plan account owner may change the beneficiary to a qualifying family member of the current beneficiary at any time without tax consequence.
Common questions we are often asked when it comes to 529s:
Q: Do I have to use the funds in the same state as my plan?
A: No – you may use the funds for any qualified higher educational institution in any state. In addition, funds can be used at over 100 foreign colleges which qualify for federal student aid.
Q: How much can I contribute?
A: The IRS limits tax-free "gifts" to the beneficiary child at $15,000 per year per person (so two parents could make a combined tax-free gift of $30,000). The rules also let you front-load a child's 529 plan account with five years of gifts by making a $75,000 deposit at once and no new contributions for the next five years. Every state has a maximum overall contribution ranging from $235,000 (MS, GA) all the way to $529,000 (CA).
Q: Can I use my funds for K – 12 expenses?
A: Yes - for post-secondary education costs, allowable K-12 expenses are limited to $10,000 per beneficiary per year.
Q: Can I use funds in a 529 plan to pay off student loans?
A: Yes – as part of the SECURE Act, which was passed at the end of 2019, you can use up to $10,000 per beneficiary to repay student loans. The SECURE Act also expanded the definition of qualified educational expenses to include costs associated with apprenticeships.
Q: My parents want to start a 529 plan for our children – but we already have one. Can they still set one up?
A: Yes – a person can be listed as a designated beneficiary on multiple 529 plans as long as contributions don’t exceed the aggregate limit for that state’s plan. As an example, if you have a 529 for your daughter in Georgia, and your parents want to open another Georgia 529 for her, the total amount of contributions to those two accounts could not exceed the state limit of $235,000. However, if your parents chose to open a 529 in a different state – South Carolina for example – contributions to the Georgia plan could not exceed $235,000 and contributions to the South Carolina plan could not exceed $520,000.
As always, your DHGWA Financial Advisor is available to help you determine what is the best way to pay for school. Our Strategic Life Planning process, which includes working with your CPA and other financial professionals, will help solve the mystery of paying for higher education.
The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.