The language of personal finance isn’t especially racy, but “debt” certainly has taken on the negative tone of other “four-letter words.” Even so, with college costs on the rise and many parents feeling especially pinched in this challenging economic environment, student loans – rather than college savings – have become the solution for many.
Loans come with the price of that aforementioned dirty word, so parents able to squeeze a few dollars into college savings plans while their children are young can dramatically lighten the load. More grandparents are also stepping in to help fund their grandchildren’s future education needs, perhaps without even realizing that they can potentially receive tax advantages in addition to giving the gift of a debt-free education.
In honor of “529 Day,” the May 29th celebration of the 529 college savings plan, Beyond Bulls & Bears tapped College Savings Foundation Chairman Roger Michaud to talk about college savings solutions for today’s families.
With total student loan debt estimated at some $966 billion and actually surpassing credit card debt,1 it makes sense to plan as early as possible for a child’s or grandchild’s future education funding needs, says Michaud.
“If you’ve got time to put money to work, every dollar you can save today will be a dollar you won’t have to borrow when your child is ready for college. I think the value of a college education is quite clear, but obtaining that college education with minimal debt is the challenge. With all the energy we put into getting our children in the right college, we often times lose sight of our ultimate goal, which is employment, independence and positioning our children for success. With two children of my own, this topic is near and dear to my heart.”
The 411 on 529 Plans
So what exactly are “529 Plans?” The name stems from a section in the Internal Revenue Code, but a 529 plan, legally known as a “qualified tuition plan,” can be sponsored by states, state agencies or educational institutions. These programs allow parents, grandparents, and even other family members and friends to help a designated beneficiary save for college.
One of the appealing features of a 529 savings plan is that money invested grows free of federal income tax when withdrawn for qualified higher education expenses, such as tuition, books, room and board. There may also be state tax benefits too.2
Financial Guidance Counselor
A College Savings Foundation survey taken in 2012 uncovered successful strategies for shoring up confidence and savings. Working with a financial advisor seemed to give many savers a leg up, according to the survey. Of the individuals who reported working with financial advisors, 65% percent had saved more than $5,000 per child, versus 34 percent of those without an advisor who had saved that much. Those with financial advisors were also twice as likely to have confidence in meeting their saving goals; 42 percent said they were completely or very confident, versus 26 percent of those without an advisor.
Since time is a saver’s major ally, one of the best things an advisor can do for parents and grandparents is to help them start thinking about college sooner rather than later, says Michaud.
“It’s best to save early and often, so there’s time for your child’s or grandchild’s nest egg to grow. But you can continue to save and contribute even during the college years via a 529 college savings plan, which can offer greater tax advantages for families, and a lesser effect on financial aid than other funding options.“
Watch our short video, “5 Strategies of Successful College Savers,” to see more strategies that can help in the quest.
More Incentives in 2013 to Save
Last year’s “fiscal cliff” fears created a lot of uncertainty about changes in the tax treatment of these plans. Fortunately, the signing of the 2012 American Taxpayer Relief Act (ATRA) in January 2013 restored many of the education tax incentives that had been slated to expire on December 31, 2012, and even resuscitated some that had already expired at the end of 2011. Benefits of 529 plans also increased for taxpayers with taxable incomes above $400,000 (married couples above $450,000) due to new higher income tax and capital gains brackets.
Michaud reports there are currently some Congressional bills on the table that, if passed, could further enhance the attractiveness of college savings plans, including the expansion of qualified educational expenses and expanded use for disabled family members’ unique expenses.
Regarding additional considerations for grandparents, who are contributing in greater numbers to help family members foot rising college costs, Michaud notes:
“Grandparents may not realize that 529 plans can be a valuable estate planning tool. Tax changes that took effect in 2013 now allow them to put a maximum of $14,000 per grandchild per year into a plan. They can also make a one-time gift of five years’ worth of contributions per person. That means a married couple could conceivably give a lump sum of $140,000 to each grandchild once every five years, and working grandparents may reap tax benefits to boot. It’s like a gift that keeps on giving.”
Tax benefits may be conditioned on meeting certain requirements. Federal tax and 10% penalty and state tax apply to non-qualified withdrawals or earnings, and a generation-skipping tax may apply to substantial transfers to a beneficiary at least two generations below the contributor. (See our Investor Handbook for more complete information.)
Moreover, parents or grandparents can use these funds toward their own educational pursuits if they choose, perhaps to prepare for embarking on a second career or for personal educational enrichment. Michaud adds that you can actually name yourself as a beneficiary of a 529 plan. Why might you do that?
“Perhaps your post-retirement plans include a second career. If you retire and want to go to college yourself, you’ve got savings socked away to do it,” says Michaud.
College savers don’t have to go it alone! It really is a family affair.
Learn about 529 College Savings Plans at Franklin Templeton and talk to an advisor for savings ideas and strategies that work for you and your family.
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What are the Risks?
All investments involve risks, including potential loss of principal.
Investors should carefully consider 529 Plan investment goals, risks, charges and expenses before investing. To obtain an Investor Handbook, which contains this and other information, talk to your financial advisor or call Franklin Templeton Distributors, Inc., the manager and underwriter for the Plan at 1-800-818-4030. You should read the Investor Handbook carefully before investing and consider whether your, or the beneficiary’s, home state offers any state tax or other benefits that are only available for investments in its qualified tuition program.
1. Source: Federal Reserve Bank of New York, data as of Q4 2012.
2. It’s important to remember that, as with any investment, principal value may be lost, and investing in the plan does not guarantee admission to college or sufficient funds for college. There is no federal or state guarantee of investments in the plan.