After 3 years, student loan payments begin again this month, you may be wishing your parents had bought more 529 plan savings and a few less toys when you were little. After all $30 a month could help pay for as much $17,000 in college costs. For all those new pandemic parents (and grandparents) it may be worth asking for donations to a college savings account rather than something from the Amazon wish list.
Why Everyone could use a plan:
My wife and I graduated from Purdue University in 2016. She paid for most of it with a full ride scholarship (because she is smart). I paid for most of it by working two part time jobs and one small scholarship in my final year. Either way, we both graduated with $23,000 in student debt.
How did you both still end up with debt? Well, scholarships don’t cover most of the “extra’s,” even full ride scholarships. Things like Greek life, club fees, concerts, football tickets, or opting to live off campus with your own shower, bedroom, A/C, parking space, and refrigerator usually aren’t covered even with living stipends. $23,000 may sound like a lot of student debt, but that was only $480 a month in loans while we were students. If we didn’t receive scholarships or chose not to work, we each could have graduated with $80,000+ in student loans from tuition alone.
Working hard and Scholarships helped pay for college, but there are still things we wish we had known that would have helped even more:
Aside from scholarships and work, my parents did help me cut down reliance on college loans, but there are things I wish had done that would have made it way more cost-effective during college and even after college. One of the most valuable tools to cut down college costs is the Indiana 529 plan. Check out some of the benefits in the table below.
UGIFT Funding Options
Allows anyone who has your unique UGIFT 529 code to make a contribution to your 529 plan. Instead of writing and mailing a check to a dorm room, parents and grandparents can donate directly to their students 529 plan without the risk of it being stolen, lost, or misappropriated on the less than educational aspects of college. They also allow the donor to collect the contribution benefits in their own name rather than the one who cashes the check.
State Tax Credits on Contributions
Federal Tax Exemption on Captial Gains
Tax Exempt Education Spending
Student Loan Repayment Exemptions
Roth IRA Rollover Eligibility
“But what if the kids don’t go to college?” In the past 529 plans were not very popular. Parents and grandparents had real reasons to worry if they overfunded the plan or if the child did not go to college. The strict tax exemption rules and limited options to retrieve unused funds did not help planners concerned about their child not attending college. Up until the last six years 529 plans were mostly recommended by CPA’s to clients who could benefit from favorable tax treatment to plans contributions. However, within the past 6 years new legislation has transformed the value a 529 plan adds as a savings vehicle, not just for college. Thanks to the Tax Cut and Jobs act of 2017, SECURE Act 1 and 2.0, 529 plans have a multitude of additional uses. Now they can help pay for trade schools, apprenticeships, and even fund rollover Roth IRA’s for qualified beneficiaries. Unlike prior years unused plans can provide benefits far beyond the original scope of “college expenses.”
Are there other ways to save for college?
Aside from the state sponsored 529 plans, there are Coverdell ESA’s, exempt IRA education distributions, exempt Roth IRA distributions, 401k loan options for exempt education withdrawals. Trusts such as a 2503(c) minors trusts, UTMA’s, UGMA’s, and even life insurance can be used to cut down the costs of college in the long run. State sponsored 529 plans are possibly the best marketed college affordability tool. Here in Indiana the “CollegeChoice 529" is hard to beat because of the tax benefits, but there are many different states that offer 529 plans. If you want to check out a list of other state plans and benefits look here. Knowing, all these different options can be a great benefit, but it’s worth speaking with a qualified Tax, Estate and financial professional to find out which ones may be most beneficial for your goals.
If you are preparing for retirement, college expenses, or just want to start investing, working with a financial advisor can be a great resource for education and investment management. Blacor would be honored to walk with you as you navigate the financial terrain. Just fill out our contact form, and one of our advisors will personally reach out.
Sources:
Securities offered through International Assets Advisory, LLC (“IAA”) – Member FINRA/SIPC. Advisory services offered through International Assets Investment Management, LLC (“IAIM”) –SEC RIA. Blacor Investments is unaffiliated with IAA and IAIM.
The information provided in this newsletter is based on carefully selected sources, believed to be reliable, but whose accuracy or completeness cannot be guaranteed. All information and expressions of opinions are subject to change without notice and are those of Blacor Investments. Past performance may not be indicative of future results. Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied on for the purpose of avoiding any tax penalties. You should discuss any tax or legal matters with the appropriate professional.