May 29 is National 529 Day—a day to raise awareness about the value of planning and saving for higher education expenses with 529 plans. With that in mind, we have some insights and reminders for you about this important savings vehicle.

Education expenses represent one of the largest financial commitments that people make in their lifetime. Pairing that with earnings potential derived from education, it is also one of the most important purchases that many people will make. In 2020-2021, the average estimated budgets (tuition and fees, room and board, and allowances for books and supplies, transportation and other personal expenses) for full-time undergraduate students ranged from $18,550 for public two-year in-district students to $54,880 for private nonprofit four-year students.  The tuition alone at some colleges can substantially exceed these amounts while some of the schools with the highest “sticker prices” offer more grant-based financial aid and scholarships to bring the prices in line with, or even below, the averages. At CCM, we recommend proactive education planning, and putting strategies in place to meet education expenses so students are set up for success in the future.

529 Plans

For many people, one of the best savings vehicles for education is a 529 account. A popular type of 529 plan is an education savings plan that allows a person to contribute after-tax money which grows tax free if used for educational purposes. Given the tax fee growth potential of a 529 account, the sooner a family considers this savings tool for a child, grandchild or other family member, the more beneficial.

Traditionally, 529 plans have been used for college and university expenses. Due to federal legislation over the last few years, eligible expenses for 529 accounts have been expanded to include K-12 tuition, student loan repayments, and registered apprenticeships. Relatedly, there is an annual limit of $10,000 on qualified K-12 withdrawals and a $10,000 lifetime limit on student loan repayments with an additional $10,000 eligible loan repayment for each of the beneficiary’s siblings. Along with having the benefit of tax-free growth, many states offer tax deductions or credits for 529 account contributions. In addition, the growth of an investment within a 529 account is outside one’s estate, and the owner of the 529 account retains control over the account regardless of the beneficiary’s age. Another type of 529 plan is a prepaid tuition plan that allows one to pay today’s cost for future education at a limited number of schools, which is a lucrative option for some families. (Note that many prepaid tuition plans have time or age limits for using the funds.)

Most families will need to make a decision about funding a 529 plan before they know the type of school or scale of expenses they’re considering for the future. A benefit of the 529 that provides future flexibility is that the beneficiary can be changed at a later time. Our team at CCM can assist you with the education projections and optimal funding levels.

The College Search and Financing

The first step for most students is determining the right fit for the type of education that is important to them. For example, which kind of school provides the ideal preparation for the career the student envisions, the life skills they desire, and the experience they want to have? Is it an experience at a 4-year school, 2-year school or a trade school? From a financial perspective, an important consideration in looking at costs after grant-based aid and scholarships are applied, is the post-graduate earnings potential. The next step for every family with a student who will be attending an institution of higher education should be to complete the Free Application for Federal Student Aid (FAFSA®). It’s the tool that most schools use to determine eligibility for both need-based and non-need-based funding sources. This is important in determining actual costs as opposed to the “sticker price.” As part of recent legislation, completing the FAFSA® form has become simpler and more efficient to complete, as the number of questions has been reduced from 108 to under 40. After conducting a college search, and determining the actual cost versus the sticker price, it’s then time to identify and determine the best funding sources for the expenses – income, loans, and/or savings. Here too, we are happy to work with you on optimal scenarios.   

National 529 Day is a Great Day to Think About the Future

As we recognize 5-29 Day, it is a good opportunity to think more about your education plan for children or grandchildren and to connect with your CCM advisor about the best strategy for your family.

Read more about working with CCM Advisory Team members on 529 Plans and Education Planning.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.