The Ups and Downs of 529 Plans

Pros and Cons of this Helpful College Savings Tool

One way to not have to worry about the high cost of college or student loan debt is by actually saving money for college expenses. Many parents and grandparents try to accomplish this using a 529 college savings account. These accounts were in the news a lot lately when President Obama proposed abandoning the federal tax incentive. Although this idea was quickly quashed, other changes have been put into effect this year.

To keep you up-to-date, here is a review of some of the ups and downs of using a 529 Plan to help pay for your child’s education:

  • Changing Investments: Previously, account holders were only allowed to change investment options once a year. Effective January 1, 2015, they can now change the underlying investment structure twice a year. This should help hands-on account holders keep up with the rapid fluctuations in the investment market, but may not affect those who are working with a financial planner to develop a plan that automatically changes the investment structure as the student gets closer to college age.
  • Computers: Distributions from 529 Plans are to be used for college expenses. In 2009 and 2010 computers and related expenses were considered a qualified expense, but this was changed to apply only for colleges which required students to have a computer. With so much being accomplished online now, there is proposed legislation which would once again restore this benefit for all students, regardless of a specified college requirement.
  • Redepositing Funds: Previously an account holder might have withdrawn funds from a 529 Plan, and then faced penalties if the student received a refund from the college for some reason. This might apply in cases such as withdrawal due to illness, or a late-arriving scholarship. Proposed legislation would now allow funds to be redeposited without incurring penalties or taxes, if the money is returned within 60 days.
  • Ownership Matters: Sometimes grandparents try to help out by establishing a 529 Plan, only to find that it may affect their grandchild’s ability to receive financial aid. 529 Plans are treated differently depending on who owns them. If it is a parental asset that is reported as such on the FAFSA, any qualified distributions are not treated as income. While third party owners, such as grandparents, do not have to report the plans on the FAFSA, the distributions from them can be considered untaxed income for their grandchild. A student receiving a distribution from a parental asset might see student aid reduced by 5%, while a distribution from the grandparents’ plan might slash the financial aid by as much as 50%. Some financial advisors may recommend keeping the 529 plan in the grandparents’ name until after the FAFSA is filed, and then transferring the plan to the parents’ name before any distributions are made.

Although it often seems like things happening in Washington have no impact on our lives, it is wise to keep up on legislation that impacts student loans, financial aid, or college savings plans. Some changes might not seem significant, but even a few hundred dollars can make a big difference when a family’s budget is stretched to the maximum to pay for a college education.

Parents and grandparents should also discuss strategy with a financial aid advisor before taking any action that might affect the student’s income status. Finally, the student should also be aware of the sacrifices and work his or her family has put into assuring that money will be available to pay for college.