Parents still don’t understand 529 savings plans

Faced with soaring college tuition costs, parents and future students alike are scrambling to find ways to help cover higher education expenses.

While many explore various forms of financial aid and contemplate tapping into personal savings, a recent Edward Jones study found that 71% of Americans have no idea what a 529 plan is.

A 529 plan is a tax-advantaged savings plan, available to anyone, that is designed to help set aside money for future education costs. Funds withdrawn are federally income tax-free and penalty-free as long as they are used for qualified educational expenses.

What qualifies? Expenses include tuition and fees, room and board and computers/software, books and required school supplies. Expect to pay income tax and a 10% penalty on earnings if it’s used for nonqualified expenses.

The survey found along with a lack of awareness, there are quite a few misconceptions surrounding these plans. Here are some common ones.

Good-bye to financial aid?:Experts say the plan (whether in the parent or student’s name) is generally considered a parental asset, so the impact it has on the amount of federal needs-based financial aid a student is awarded is minimal.  According to the U.S. Department of Education, the maximum a 529 plan can reduce financial aid is 5.64% of the account’s value above the Asset Protection Allowance. (The Asset Protection Allowance amount varies based on the parent’s age.) Compared to other types of custodial accounts, which are counted as a studentassetand thus reduce available financial aid by 20% of their value, 529 plans can leave more on the table for families to use.

My kids’ college choices are limited: As long as the college or university (whether traditional public/private, technical, community college or graduate school) is eligible for U.S. Department of Education financial aid programs, you can use your 529 plan money.

If my child opts out of college, I’m stuck: Parents can change the beneficiary to another family membem or even themselves. That means a 529 plan could potentially be an opportunity to further your own education. And even if you have zero interest in going back to school, you can always save it for your grandkids.

 

Myriam DiGiovanni

Myriam DiGiovanni

After writing for Credit Union Times and The Financial Brand, Myriam DiGiovanni covers financial literacy for FinancialFeed. She is also a storytelling expert and works with credit unions to help ... Web: www.financialfeed.com Details