Saving for College with 529 Plans
Dr. Paul Wrubel provides workshops and college funding advice and recently launched TuitionCoach, an internet-based program to help students and parents find and make the most of college financial aid. Excerpted from "Paul's Corner" on TuitionCoach.comKathleen Pender's column in the February 15th issue of the San Francisco Chronicle highlighted the murky world of 529 plans. On its face, a 529 college savings plan is a good idea. Money can be put aside tax free; it can grow tax free; and in some states it can be used to pay for college tax free. All of this is good news but once one starts to look under the wrapping, for some, it may be an unwelcome lump of coal.
The benefits of a 529 plan are uneven. For the very wealthy, those who are not likely to qualify for need-based financial aid, it is a bonanza despite the often high administration fees and the loss of control over how the funds are being invested. For middle income families it is a mixed blessing and for low income families is an out-of-reach illusion.
High income families benefit in nearly every way from a 529 plan. It was designed for them and the design fits like a fine leather glove. What high income families are looking for is any way to make college costs deductible in some way and on this 529 plans deliver particularly in those states that extend the tax-free benefits to the state tax system.
For middle income families, the picture is mixed. First, since few middle income families have the resources to cut an annual check for college, they will rely on getting some need-based financial aid for college. On that score, TuitionCoach can help mightily. But since parents' assets are an integral part of the formula for determining eligibility for financial aid, a 529 plan that may promise a return of 5 or 10% annually tax-free may be partly offset by lowering financial aid eligibility by 5.6% annually. There is, however, some traction in Congress for the idea of excluding the entire value of the 529 plan from the federal formula that determines how much a family can afford for college. If that happens, 529 plans will rise on the "attractiveness scale" for middle income families. But there is another factor. For every dollar buried into a 529 plan, that may represent one less dollar put aside for retirement. Remember, retirement assets are excluded from financial aid formulas so money put aside for that purpose can have all and probably even more long-term benefits as an investment than the 529 plan. Remember too, the 529 plan is currently exposed as an asset for college which must be used solely for college to reap the tax-free benefits of the investment. To use it for any other non-qualifying purpose in a family emergency reduces a 529 plan to just a poor investment after the tax "hit" and penalties are dealt with.
For low income families struggling to simply pay for basic day-to-day living expenses, the 529 plan is an illusion about what people on another planet do. That's the bad news. The good news is that low-income families will be eligible for lots of need-based financial aid anyway up to the entire cost of college. That can be a pretty attractive planet too.
Stay posted as the great 529 plan debate unfolds. It is interesting but it begs the real issue; the system of college financial aid is too complicated, too convoluted and too counter-intuitive. The whole thing needs to be revisited by smart people with the nation's interest stage center. In such a system the demand for things like 529 plans and yet-to-be-created college plans "du jour" may not be necessary at all.
For more about specific 529 plans, go to Savingforcollege.com
About the Author
Dr. Paul Wrubel has provided college admissions and funding advice to over 4,000 clients around the globe. Along the way, he discovered the process of paying for college was needlessly mysterious and incredibly stressful. Paul co-developed TuitionCoach to provide an online solution that brings greater transparency and accessibility to the college funding process for all families.
