How to Use a 529 Plan to Pay for College: The average cost of undergraduate tuition, fees, and living expenses climbed by 169% between 1980 and 2020. Making a strategy for how to pay for college is crucial for students and their families because of the financial burden that college entails. 529 plans are one common method of saving money for education.
Although there has been a large increase in interest in 529 plans recently—they had $411 billion in assets in 2022—the plans are more complicated than the typical savings account, and many people are unclear of how to use a 529 plan for college specifically.
What is a 529 Plan?
529 plans, at their core, are tax-advantaged accounts created expressly to assist in saving for educational costs. As long as they are used at a qualified school and used for qualifying education-related expenses, earnings on your and/or your family’s investment in a 529 plan and withdrawals from it are free from federal taxes—and frequently free from state taxes as well. The majority of graduate and postgraduate schools, as well as community colleges, are able to use a 529 plan.
Tuition, required fees, books, computer equipment, and room and board are all considered to be qualified educational costs. The cost of travel to and from college and fraternity/sorority dues aren’t eligible, and spending money from a 529 plan on them could result in paying unanticipated taxes or penalties. It’s important to keep in mind that not all costs related to attending school are qualified expenses.
Even a little investment can quickly grow in a 529 plan. Beginning when a child is born, $50 monthly contributions to a 529 plan can build up to $16,600 by the time they are 18. This is according to Fidelity. By the age of 18, a $250 monthly commitment made starting at birth can total more than $80,000.
How to Reduce the Cost of a College Education
Making your education more inexpensive will ensure that the funds you and your family have saved in a 529 plan are used as efficiently as possible.
1. Examine the schools that provide for every need
Examining institutions that claim to satisfy the financial needs of approved applicants with financial aid packages that may include a mixture of scholarships, grants, work-study, and loans is a tried-and-true method for making college more inexpensive. Many universities adopt need-blind admissions, which means they don’t take into account an applicant’s financial position when making admissions decisions. They also satisfy 100% of students’ demonstrated need.
Some institutions offer loan-free financial aid policies and won’t use loans to help students who have shown financial need. They give out more money in grants and scholarships rather than loans. This is a desirable choice with a great advantage because it allows you to complete education debt-free and without having to pay additional interest costs.
2. Take into account schools where your student has a solid resume.
Another excellent way to minimize the expense of education is to submit applications to universities where your child’s profile is very high. Less selective institutions frequently use significant merit aid offers to recruit good students—or applicants—to their campus. These applicants should possess the attributes the institution is looking for.
Merit aid is given out for a variety of reasons, such as academic excellence and credentials, talent in a particular field (such as sports or music), and a dedication to volunteerism. A certain SAT or ACT score, for example, may qualify applicants for scholarships from several universities.
3. Constantly use a net price estimator.
You must be aware of the true cost of college in order to fully appreciate its expenditure. Unfortunately, a school’s sticker price is rarely a reliable indicator of what you will actually pay. In reality, 89% of students at private, nonprofit four-year colleges—a group that includes several of the country’s most prominent institutions—don’t pay full price, according to a 2019 New York Times Magazine piece.
Consider a school’s net price instead of its sticker price for a more accurate idea of what you can anticipate to pay for education. Take the overall cost of attendance, which includes tuition, fees, books, accommodation and board, etc., and subtract any grants or scholarships you receive to arrive at your net price. Finding out the actual cost of college is now even simpler thanks to the net price calculators that the majority of universities offer on their websites. Now read on to find out how to use a 529 plan to pay for college education.
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How to Use a 529 Plan to Pay for College
There are two main ways to use a 529 plan to pay for college. The first approach is to send the funds directly to the school from a 529 account. The second is to transfer the funds to a bank account first, then pay for the student’s tuition from that account.
1. Pay 529 funds to the college directly
The quickest and easiest way to pay for college with a 529 plan is to send money directly from a 529 plan to a college or university. This procedure ensures that funds are allocated to acceptable education-related expenses and transmitted to the correct office inside the college or university. It also avoids the multi-step payment process and streamlines accounting.
The risk of a middle party (you or a member of your family) making an expensive error is eliminated when money is transferred directly from a 529 plan to a college. This puts the transaction in the hands of people who are experienced with the distribution of funds—administrators of the 529 plan and the college.
2. Before paying the college, transfer 529 funds to a bank account.
Although paying for college with a 529 plan directly from a 529 account is the simplest option, you may want to choose to pay for college with money from a personal bank account instead—either by transferring money first to your personal account or by paying yourself back for costs you’ve already incurred.
This tactic has certain benefits. In particular, it gives you more freedom to spend 529 funds for educational costs that aren’t specifically connected to a university, such books, a computer, necessary software, or even off-campus accommodation.
The disadvantage of transferring money from a 529 plan to your personal bank account before paying for college costs is that it can make record-keeping more difficult and raise the possibility that the money will be used for an unqualified purpose. If you or your family uses this payment method, it is crucial to keep thorough records (i.e., records that link fund distribution to expenses) and to stay away from unapproved expenses.
It’s also important to keep in mind that this procedure frequently takes longer than just transferring money from a 529 plan to a college. Money might go between accounts and take days for a school to process a payment. You must provide ample time for the disbursement of payments if you use this strategy.
Frequently Asked Questions
Who may possess a 529?
A 529 plan is open to everyone. Any beneficiary, including yourself, is up for selection. Additionally, there is no restriction on how many 529 plans you can own. For the same beneficiary, you may hold more than one 529 plan, but they cannot all be from the same state.
Must I use the 529 plan in my own state?
No, any 529 plan is acceptable. Any eligible school in any state, including some abroad, is eligible to use a distribution.
Should I use my 529 plan for college or K-12 expenses?
K-12 expenses are covered by 529 plan money, up to $10,000 per student, naturally tax-free. That is true whether the school is public, private, or religious. Until recently, 529 plans could only be used to pay for college expenses.
What happens if the recipient is awarded a scholarship?
It's every parent's desire, so congrats. There are several options open to you, including a great little extra option that is typically not offered. The beneficiary might first be changed to any other member of the beneficiary's family. This may be a child (your grandchild), a sibling, a step-sibling, a first cousin, an aunt or an uncle, a parent, an in-law, or a grandparent.
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