Five Tips for Parents and Grandparents to Save for College
While many parents agree that they’d like their children to attend college, how to pay for it is another matter. College is expensive and tuition is significantly higher than it was two decades ago. Even state schools – long viewed as the affordable option for undergraduates – are increasing tuition significantly. According to a 2017 paper by the Center on Budget and Policy Priorities, state spending on public colleges and universities remains at a historic low since the Great Recession in 2008.1 In fact, in-state tuition prices among national universities grew by 68 percent over the ten year period from 2008 to 2018. That increase was more than the published tuition hikes among private universities during that period. 2
Parents have increasingly turned to 529 plans to help them save for college and deal with higher costs. 529 plans allow anyone to set up a savings plan for college expenses and avoid paying taxes on the growth of the funds if used for qualified expenses. The use of these plans has increased dramatically. Nationally, total assets held in state-sponsored plans grew from an inflation-adjusted $176 billion in 2010 to $318 billion in 2017, an increase of 81%.3 Here are five tips for parents and grandparents on how to use 529 plans most effectively for college savings.
1. Save Early
Parents who start saving early can benefit from the growth of the portfolio over time and reduce the total amount they need to save. For example, a couple who sets aside $5,000 per year for ten years (for a total of $50,000) when their child is born until the child is age 10 and earns a 6.5% average annual return on their investments would have $88,701 saved for college when the child turns 18. In contrast, parents who start saving $8,000 per year when their child is 10 for seven years (for a total of $64,000) will have $85,855 saved for college when the child turns 18. By saving early the first family put away $14,000 less and still had more than the family who started later.
2. Have 529 Plans Owned by Parents, Not Grandparents Or Relatives
The financial aid impact of a 529 college savings plan depends on who owns the account. Generally, if a 529 plan is owned by a dependent student or dependent student’s parents it has a minimal impact on eligibility for need-based financial aid. However, if the 529 plan is owned by anyone else, such as a Grandparent, aunt, or uncle, it will hurt aid eligibility. This is because accounts owned by dependent students or their parents can be considered for up to 5.64% of their value for financial aid purposes. Accounts owned by anyone else (including Grandparents), by contrast, can be considered at up to 50% of its value for aid purposes. In other words, $10,000 in a student-or-parent-owned 529 plan will reduce eligibility for need-based aid by as much as $564, while $10,000 in a grandparent-owned 529 plan will reduce eligibility by as much as $5,000. If you hold a 529 plan in a grandparent-owned account you can switch the account owner to the parent (if the plan allows it).
3. Use the “Automatic College Affordability Plan”
For parents worried about paying for college use this approach: as your child gets closer to college determine how much you can help them with college costs each year and how much they could contribute. With that number in hand use a tool like the College Scorecard Database (https://collegescorecard.ed.gov) and filter schools based on the estimated real cost to attend (also called the “average annual cost”) that matches how much you and your child can afford. By eliminating schools that cost too much for your budget you help ensure that whatever college your child is admitted to and attends should be affordable for you and your family. Please note, every school handles financial aid differently and you’ll need to complete the Free Application for Federal Student Aid (FAFSA) form to receive specific information from a school on what the specific costs would be for your child.
4. Contribute to a 529 Plan and Use It The Same Year (if you are eligible for a State tax benefit)
It may seem odd to contribute to a savings account only to withdraw the funds in the same year. However, if you are eligible for your State’s tax benefit for making a contribution to a 529 plan you can make a contribution and withdrawal in the same year (assuming you do not yet have enough in the 529 for your child’s college expenses). You would benefit from the tax benefit in the calendar year in which you make the contribution.
5. Create a Family Education Endowment
High-net worth families can fully fund a 529 plan up to the lifetime limit and use it for the benefit of multiple children and grandchildren by changing the account owner and beneficiary. Lifetime limits vary by state and may range between $300,000 and $475,000 and usually require a special five-year election and other gifting techniques. If the plan in a family’s state has a lower lifetime limit they can open an account in a different state with a higher limit. Families considering this approach should consult with their tax advisor to review gift tax questions and Families can have a 529 plan set up as a family education endowment owned by a trust to increase the amount of oversight over distributions. This would allow the trustees of the trust to determine how much to distribute to each beneficiary and when to change beneficiaries.
1. “A Lost Decade in Higher Education Funding” Center on Budget and Policy Priorities, 8/3/17
2. “In-State Tuition Increases Sharply at Some Public Schools” U.S. News, 9/20/17
3. “Use of 529 Plans Rising – Along with Revenue Impact” Pew Trust, 8/8/18