Until recently, I had a general understanding of 529 plans, but there were a lot of things I didn’t understand. Call it irony or a vicious circle, but being in the trenches of student debt payoff, I hadn’t taken the time to research and investigate college savings options for my children. Recently we made the decision to start contributing to 529s for each of our four children. The more I learn, the more I am happy that we got started.
Today I want to address some of the my myths and misconceptions about 529 college savings plans. Before researching 529s, I had some of these beliefs as well!
Myth #1: If you get a scholarship, your 529 savings is in vain.
Truth: If your child gets a scholarship and ends up not needing all the money you have saved, you can withdraw the amount of the scholarship without penalty. You will have to pay taxes on the earnings (the interest accrued) like you would if the earnings had been on a non-tax-advantaged account. By all means, encourage your kids to get scholarships, but don’t let the hope of a scholarship stop you from saving!
Myth #2: Beneficiaries of the 529 account that you set up cannot be changed.
Truth: As the owner of the 529 account, you maintain complete control over the funds. You can change the beneficiary at any time and for any reason. Your beneficiary doesn’t even have to be related to you. YOU can even be the beneficiary if you plan to go back to school.
Myth #3: If my child decides not to go to college, my savings is in vain.
Truth: Funds from your 529 account can be used at trade schools and other post-secondary educational endeavors. You can also change the beneficiary to be one of your other children or even yourself. There are generally no time limits or age limits. Your account assets can grow in perpetuity. You can also cash out your assets as a non-qualified withdrawal, but you will have to pay taxes and penalties on the earnings when doing so.
Myth #4: My child will be penalized on student aid applications if we set up a 529 for him or her.
Truth: A 529 does not disqualify a student for financial aid. On the FAFSA (Free Application for Federal Student Aid), the 529 plan assets are considered assets of the owner (the parent) not the beneficiary (the student). Assets from a 529 plan owned by the parent factor into the expected family contribution (EFC) at a rate of 5.6%, just like any other parental asset.
Myth #5: You can’t start a 529 for yourself as an adult.
Truth: You most certainly can be the beneficiary of your own 529 college savings plan. If you are planning to further your education in the future, a 529 is a great place to set aside money for your degree. Not only can you start a plan for yourself, but you can also change the beneficiary of your children’s 529 accounts to yourself (see Myth #2). This is one thing we could have done before my husband went back to school for his law degree.
Myth #6: I can’t get a 529 because I don’t know the state where my child will attend school.
Truth: Your 529 plan usage is not restricted by state or by state residency. Your account assets can be used at any eligible educational institution that is accredited. That includes four-year colleges and universities, many two-year institutions, graduate schools, and doctorate programs, as well as vocational and technical schools. Check the FAFSA website to see if a school is accredited (any school that accepts federal student aid).
Myth #7: Money from a 529 can only be used for tuition.
Truth: Funds in your 529 account can be used toward all qualified higher education expenses. In addition to tuition and fees, that includes room and board, books, supplies, and required course equipment. The cost of rent off-campus (even in you’re living at home) as long as it is with in the school’s state “cost of attendance.”
Myth #8: Setting up a 529 is too complicated and expensive.
Truth: Through ScholarShare, California’s 529 College Savings Plan, the initial deposit can be as little as $25. There’s no application fee, no transfer fee, and no annual maintenance fee. Just have your beneficiary’s social security number handy and you’ll be able to set your 529 up online.
How About You?
- How well versed are you in 529 plans?
- Were any of these 529 myths surprising to you?
I have teamed up with ScholarShare to spread the word about the 529 college savings plan. I will be compensated for my efforts. As usual, the words and opinions here are all my own.