Paying for College – 529 plans

College can be paid for in a number of different ways – you can save up in advance, you can work and pay along the way, you can excel in academics, sports or other areas and get scholarships, you can pay with grants or loans or you might just have a rich relative that is willing to pay it for you.

In today’s article I want to cover the first option – saving up in advance.

In 2013 the Center for Social Development did a study called “Small-Dollar Children’s Savings Accounts, Income, and College Outcomes”(1) where they share some interesting findings:

• 61% of low- and moderate-income (LMI) children have no savings account for college.
• An LMI with savings for college is three times more likely to enroll in college than a child with no savings, and more than four and a half times more likely to graduate.
• Only 5% of LMI’s with no savings will graduate, while 25% of those with savings of $1-$499 will graduate, and 33% of those with $500 or more set aside will graduate.

These numbers are significant – compared to their peers from a similar socioeconomic background, setting aside between $1-$499 for your child or grandchild makes them three times more likely to enroll in college and four and a half times more likely to graduate. That’s not a lot of money for those outcomes.

In addition, the government has provided some great tax benefits to saving for college in special accounts called 529 plans. Each state has at least one 529 plan, but they all share these benefits:

• Tax-free investment growth
• Tax-free withdrawals for qualified expenses
  • Qualified expenses include tuition, fees, room and board, textbooks, computer, printer and software as well as any other required fee from a university or college
• You can use the money to pay for education expenses in any state
• The account holder maintains ownership of the account
• You can change the beneficiary any time you want
• If your child gets a scholarship you can withdraw up to the amount of the scholarship and just pay taxes on the earnings
  • Non-qualified withdrawals (i.e. those not for qualified expenses) are subject to taxes and a 10% penalty on the earnings
• Legally there is no maximum amount, though in reality most people want to keep the annual contribution below $14,000 if you are single, and $28,000 if you are married(2)

Many states offer a tax deduction or credit of some kind if you live in that state and invest in that state’s 529 plan. NerdWallet has created a list of which states offer a deduction or credit here:

https://www.nerdwallet.com/blog/investing/529-plans-list/

Which plan should you invest in? You want to find a plan with low fees, direct-investing (which means you pay no commissions on the investment) and, if possible, a tax deduction or credit.

Consumer expert Clark Howard said, “Utah is by far the single best plan in the country.” He also lists Iowa, New York, Georgia and Michigan as great plans.(3) Morningstar rates Utah’s plan as “…one of the best in the U.S.”(4)

You can explore your state’s plan further from the NerdWallet link above, but if you are looking for a great plan you can’t go wrong with the Utah Educational Savings Plan (https://uesp.org/). It is direct-sold, has low-fees, and has good investment options with Vanguard. There is no fee to open the account, there is no minimum investment and Utah residents can get a Utah State tax credit for contributions.(5)

Remember – saving as little as $1-$499 for your child’s college education dramatically increases the odds of them going to, and graduating from, college, which will increase their lifetime earnings, decrease their chances of living in poverty and decrease their chances of being unemployed.(6)

1. https://csd.wustl.edu/publications/documents/wp13-06.pdf
2. Note that it could actually be much higher than this if your plan allows it, but that gets into estate planning issues, which we aren’t going to get into here.
3. http://clark.com/education/clark-updates-his-529-guide-for-2010/
4. https://uesp.org/morningstar-utah-educational-savings-plan-is-one-of-the-best-in-the-u-s/
5. This is not tax advice – check with your tax advisor or preparer to ensure you get the maximum benefit.
6. This is assuming they choose the right major, but that will have to be covered in another article.