New Law Expands Uses for 529 College Savings Accounts
Happy Monday All! For this week’s Money in the Media Monday we’re taking a look at an article from the New York Times, called “New Law Expands Uses for 529 College Savings Accounts.” This article goes through the latest updates to the 529 savings plans and a couple of strategies that may be helpful to implement them.
What is a 529 Plan?
The 529 plan was created as a tax beneficial way to save for your child or grandchild’s schooling. First, let’s take a look at the flow of 529 contributions.
An important note to this is that you do NOT have to contribute to the plan associated with the state you live in. You can pick the plan with the best benefits and progress from there. Here is a great resource showing each state’s plan and how you might benefit tax-wise.
The plans were initially very limited in their accepted uses, covering only accredited four-year schools. This was something that was making us hesitate about 529 plans for our future children. Especially since working in the trades can be such a fulfilling and lucrative endeavor without incurring the wrath of the student loan gods.
Fortunately, over the past several years, laws have now expanded the possible uses for 529 funds in order to keep up with the changing college climate.
What Are the Changes?
The recently released Secure Act has now opened up several aspects of spending for 529 funds in several important ways:
- Up to $10,000 can be used to repay the beneficiary’s student loans
- Up to another $10,000 each can be used to repay student loans held by the beneficiary’s siblings
- Allows payment for qualified apprenticeships, which can be trade school programs. To qualify, the apprenticeship must be registered with the Federal Labor Department.
Previous expansions of 529 fund usage allowed for up to $10,000/year/ student to be used to pay for pre-college school tuition from kindergarten onward. This makes private school educations potentially more affordable for some. My personal view on this though is that money should be poured into public schools to improve them, rather than making it easier for the privileged to disengage from the system, but I digress.
Before any of these changes, the 529 funds were only allowed to pay for costs like tuition (at qualified colleges/universities), fees, housing, meal plans, books and supplies.
How Can The Changes Help?
Let’s start with the obvious answer. Allowing for the payment of apprenticeship costs, assuages the fears that many parents and future parents, such as yours truly, had about putting money into these accounts only to have your child decide not to attend college. This should allow for greater use of the program and will help boost the trades by allowing for payment of their apprenticeship programs in this manner.
How about the student loan repayment? How does that even make sense to have both 529 funds AND student loans? Here’s where the New York Times helps us out:
Say a family has several children, each with a separate 529 account. If a younger sibling attends a less expensive college and does not need the full balance in the account, the family could use the money to help pay down the student debt of the older sibling.
Another way to end up with excess funds is to have the fortune to graduate from a 4 year program in 3 years.
If there is a situation where an “excess” of 529 funds occurs, the beneficiary and their siblings can use up to $10,000 of funds towards their loans. Here’s an interesting catch though, the beneficiary of a 529 can be changed fairly easily. So, if your child ends up with excess funds in their account, but you as the parent have either parent loans or your own student loans, you can change the beneficiary to yourself. From there, you can pay off up to $10,000 of loans in your name with that money.
Wrap It Up!
Overall, the Secure Act offers families greater flexibility within the family to use the 529 funds. I’m also extremely pleased that it expands the use to apprenticeships. This makes the plans even more appealing for when we start our family in the next couple of years. If you were on the fence about opening a 529 plan, hopefully some of the recent changes make the plans more appealing to you too.
One caveat before we wrap this up, if you are not on track or ahead for your retirement savings, I do not recommend sacrificing that security to help fund your child’s higher education. If they take out student loans, there is a much longer timeline for them to recover before their own retirement than you. Speaking from personal experience of having to do both, I’d rather pay off student loans when young with little expenses than pay MUCH more to cover your expenses when you run out of retirement savings. Of course, we love our parents and children, but put your own oxygen mask on first before attempting to help others.
Do you currently saving in a 529 plan for your child or grandchild? Which plan did you choose? Let me know in the comments below!