Let Your Money Work For You, Avoid Tuition Sticker Shock Later

The cost of college is rising and so is student debt. Learn how parents and grandparents can help kids pay for college with 529 college savings plans.

4 min read
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The average 2016 college graduate holds $37,172 in student debt, a 6% jump in debt compared to 2015 graduates. While you may be planning back-to-school shopping lists for your young kids right now, you might think about carving out some time to set up a 529 college savings plan. These plans can help you build college savings and potentially avoid tuition sticker shock later on. Help your kids or grandkids start out adult life with the least amount of debt burden possible.

It's no secret the cost of a four-year diploma keeps climbing. Over the last decade, tuition rates at both public and private universities increased at an average annual rate of 3.4% beyond inflation, according to a report from the College Board.

Most parents can no longer afford to simply save money in a savings account for children and expect to have sufficient funds to cover tuition by the time children begin college. In order to keep up with rising education costs, parents have an opportunity to invest at least a portion of education savings in investment portfolios and let the money work for them. Importantly, withdrawals from a 529 savings plan are never subject to federal tax as long as they’re used for qualifying post-secondary education expenses.

·      The basics: A 529 college saving plan is simply an account that can be used to invest for college expenses.

·      The benefits: Federal tax-deferred earnings growth and federal tax-free distributions. Some states offer a tax deduction for contributions as well.

·      The risks: Investments in 529 plan accounts are not guaranteed and are subject to investment risks, including loss of principal. There’s also no guarantee that contributions and any investment returns will be adequate to cover future education expenses

3 Points About 529 Plans

1.     All 529 Plans Are Not Created Equal: It pays to shop around when it comes to 529 college savings plans. You are not limited to your home state's plan. Check with your home state plan first to see if they offer a tax deduction as that may be a good incentive to consider that plan. When shopping for plans, look at fees, investment options, and tax savings opportunities to help you choose the best option for your family. Your contribution limits are not the same as an Individual Retirement Account. Each individual plan sets its own contribution limit. Check with the plan you are considering.

2.     The Athletic Scholarship: Your kid is a rock star soccer player, golfer, or lacrosse player. If your super star athlete earns an athletic scholarship, the good news is you can transfer the beneficiary to another family member like other siblings, nieces, or nephews. Or if you want the money back, you can withdraw the funds, but you might incur a 10% penalty on any accumulated earnings. It’s best to discuss this with your tax advisor.

3.     Grandma and Grampa Can Help Too. With some four-year private colleges costing more than a down payment on a house, in many families, grandparents are coming to the rescue. Multi-generational savings and contributions for college are a growing trend. With multiple family members contributing, the college financial load could be much easier to manage all around.

For grandparents: For IRS tax purposes, 529 plan contributions are considered gifts.

There are no minimum contributions and grandparents can fund up to $14,000 per year per child or up to $70,000 total in a single year, without incurring federal gift taxes.

Financial Aid Considerations

In financial aid calculations, if the 529 plan is owned by a parent, it is considered an asset of that parent. Generally, the parents’ ownership of the 529 plan factors into a family’s expected family contribution (EFC), but parental assets are assessed at a lower rate. It’s important to also remember that the rules are different if the 529 plan is owned by a grandparent. The value of assets owned by a grandparent (or other non-parent) is not reportable on the Free Application for Financial Student Aid (FAFSA) financial aid application.

Here's how it works: The financial aid formulas utilized by the federal government and colleges to determine what portion of family assets are eligible for consideration usually favor saving money in the parent's name over the child. While parental assets are assessed at up to a 5.6% rate, a child’s assets are assessed at a 20% rate. A 529 account held in a grandparent's name is not counted as a portion of the EFC formula.

Automate the College Savings Process

Contributing regularly and investing the funds can allow you can take advantage of market growth to help pay for your child’s college expenses. Let your money work for you starting right now. An automatic savings plan with even a small amount socked away each month could grow bigger than you might expect. Let time work for you.

All Your Educational Resources, All in One Place

The cost of college is high, but an education account can help you put aside money to help pay for your child’s college expenses down the road. 


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Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

An investor should consider a 529 college savings plan’s investment objectives, risks, charges and expenses before investing. The plan issuer’s official statement contains more information and should be read carefully before investing.

Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.  

This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice. TD Ameritrade does not provide tax advice.  

Investments in 529 plans are not guaranteed or insured by the FDIC, SIPC or any other government agency, and are not deposits or other obligations of any depository institution.  

Withdrawals used to pay for qualified higher education expenses are typically free from federal income tax. These expenses include tuition, fees, books, computer equipment and software, supplies and equipment required for enrollment at a qualified institution of higher education. Room and board is considered a qualified education-related expense if the student is enrolled on at least a half-time basis. The earnings portion (if any) of a Non-Qualified Withdrawal will be treated as ordinary income to the recipient and may also be subject to an additional 10% federal tax penalty.

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