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529 Plans Are Hard to Beat

Raising kids is hard enough, so why not make things easier for yourself when it comes to saving for college? Ideally, you want a savings vehicle that doesn’t impose arbitrary income limits on eligibility; lets you contribute a little or a lot, depending on what else happens to be going on financially in your life at the moment; lets you set up automatic, recurring contributions from your checking account so you can put your savings effort on autopilot; and offers the potential to stay ahead of college inflation, which has been averaging 3% to 4% per year.1 Oh, and some tax benefits would be really nice, too, so all your available dollars can go to college and not Uncle Sam. Can you find all of these things in one college savings option? Yes, you can: in a 529 plan.


529 college savings plans offer a unique combination of features that are hard to beat when it comes to saving for college, so it’s no surprise why assets in these plans have grown steadily since their creation over 20 years ago.

Eligibility. People of all income levels can contribute to a 529 plan — there are no restrictions based on income (unlike Coverdell accounts, U.S. savings bonds, and Roth IRAs).

Ease of opening and managing account. It’s relatively easy to open a 529 account, set up automatic monthly contributions, and manage your account online. For example, you can increase or decrease the amount and frequency of your contributions (e.g., monthly, quarterly), change the beneficiary, change your investment options, and track your investment returns and overall progress online with the click of a mouse.

Contributions. 529 plans have high lifetime contribution limits, generally $350,000 and up. (529 plans are offered by individual states, and the exact limit depends on the state.) Also, 529 plans offer a unique gifting feature that allows lump-sum gifts up to five times the annual gift tax exclusion — in 2020, this amount is up to $75,000 for individual gifts and up to $150,000 for joint gifts — with the potential to avoid gift tax if certain requirements are met. This can be a very useful estate planning tool for grandparents who want to help pay for their grandchildren’s college education in a tax-efficient manner.

Tax benefits. The main benefit of 529 plans is the tax treatment of contributions. First, as you save money in a 529 college savings plan (hopefully every month!), any earnings are tax deferred, which means you don’t pay taxes on the earnings each year as you would with a regular investment account. Then, at college time, any funds used to pay the beneficiary’s qualified education expenses — including tuition, fees, room, board, books, and a computer — are completely tax-free at the federal level. This means every dollar is available for college. States generally follow this tax treatment, and many states also offer an income tax deduction for 529 plan contributions.


But 529 plans have some potential drawbacks.

Tax implications for funds not used for qualified expenses. If you use 529 plans funds for any reason other than the beneficiary’s qualified education expenses, earnings are subject to income tax (at your rate) and a 10% federal penalty tax.

Restricted ability to change investment options on existing contributions. When you open a 529 college savings plan account, you’re limited to the investment options offered by the plan. Most plans offer a range of static and age-based portfolios (where the underlying investments automatically become more conservative as the beneficiary gets closer to college) with different levels of risk, fees, and management objectives. If you’re unhappy with the market performance of the option(s) you’ve chosen, you can generally change the investment options for your future contributions at any time. But under federal law, you can change the options for your existing contributions only twice per year. This rule may restrict your ability to respond to changing market conditions, so you’ll need to consider any investment changes carefully.

Getting started

529 college savings plans are offered by individual states (but managed by financial institutions selected by the state), and you can join any state’s plan. To open an account, select a plan and complete an application, where you will name an account owner (typically a parent or grandparent) and beneficiary (there can be only one); choose your investment options; and set up automatic contributions if you choose. You are then ready to go. It’s common to open an account with your own state’s 529 plan, but there may be reasons to consider another state’s plan; for example, the reputation of the financial institution managing the plan, the plan’s investment options, historical investment performance, fees, customer service, website usability, and so on. You can research state plans at the College Savings Plans Network.

How to Land a Better Financial Aid Package

Your child has applied to several colleges, and the financial aid awards are starting to arrive. But when you take a look, they’re less than what you expected. Or maybe your returning college student got less aid than he or she did last year. Is there anything you can do to get more financial aid?

First, compare apples with apples

When comparing financial aid awards from different colleges, make sure you’re comparing apples to apples. Specifically, look at what your actual out-of-pocket costs will be at each college, not just the total amount of aid offered. To determine your out-of-pocket cost, subtract the total amount of grants/scholarships and work-study offered from the total cost of each school. For example, consider the following three aid awards:

College ACollege BCollege C
Total Cost$30,000$50,000$70,000
Aid Package$13,000$26,000$56,000

In this example, even though College C is the most expensive school and has the highest loan amount of all three schools, it has the lowest out-of-pocket cost. And even though College B’s total aid package is double College A’s award, College B will end up costing you more than College A. In fact, College B will cost $9,000 more out-of-pocket than College C, even though College C’s sticker price is $20,000 more than College B.

Look closely at grant details

College grants often make up the largest portion of a student’s financial aid award, especially at private colleges. If your child’s aid package contains a college grant, you’ll want to understand the details. First, confirm whether it’s being offered for all four years or just one year. Second, is it based on need, merit, or both? If the grant is based on financial need, keep in mind that the amount may fluctuate with changes to your financial picture. Third, if the grant carries through all four years, find out if there are any requirements your child will need to satisfy to maintain eligibility, such as a minimum GPA, community service hours, or participation in a certain activity. Also, it couldn’t hurt to ask if the grant will increase each year to keep up with the likely annual increase in tuition and fees.

Getting a more favorable deal

Let’s assume you’ve compared aid awards and you’re ready to zero in on one or two colleges that your child has his or her heart set on. Is it possible to request a more favorable aid package? The answer is yes. The financial aid administrator (FAA) at each college has the authority to exercise “professional judgment” to reduce the loan portion of your child’s aid award and increase the grant, scholarship, and/or work-study component. Your chances of prevailing are best in two situations:

1. You have a special circumstance that affects your ability to pay (e.g., a recent job loss, prolonged unemployment, unusually high medical expenses, or some other situation that puts above-average constraints on your income and savings).

2. Your child has been accepted at two competing colleges, and one has offered a more generous aid package than the other. In this case, you might try to play one college against the other. Although many colleges don’t mind losing an applicant to a more (or less) selective college, they generally don’t like to lose an applicant to a direct competitor.

If neither of these situations applies, you can still contact the FAA to plead your case, but the outcome may be more uncertain.

The process typically involves a polite business letter or email to the FAA, with a follow-up telephone call or meeting a week or so later. Avoid calling first and complaining. Instead, explain in positive terms how much your child wants to attend that particular school, highlight your child’s accomplishments, and politely request if any additional grant, scholarship, or work-study aid might be available. Make sure to put your child’s name at the top of all correspondence, and keep a copy for your records. You want to be persistent, but not to the point of being a pest.

Whether or not you’re successful will depend primarily on the individual circumstances of the college. How much discretionary grant aid does the college have available? Is it meeting its enrollment goals? Does your child possess the qualities or skills that would make the school more diverse and well-rounded in a way that fulfills the college’s needs? No one can predict the answers to these questions, which is why requesting a more favorable aid package can’t hurt, as long as it’s done the right way.

1 College Board, Trends in College Pricing, 2014-2018

Source: Broadridge

Posted in: Planning

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