How do You Decide When to Use the Money in Your 529 Plan?

This spring, we talked to hundreds of college-bound seniors and their families about getting ready to pay for college.  So many families have found that they didn’t receive as much financial aid as they had been hoping for, and many are now wishing that they had started saving sooner and saved more.  And many of those families who do have savings set aside are uncertain about how and when to use their savings for college costs.
Someone at a recent MEFA Paying for College seminar asked me: How do we decide when to use the money we have saved in the 529 plan? Should we spend it all up front, or divide it over four years and borrow at the same time?

As usual, with important financial decisions, it depends.  Every family’s situation is different, so once you’ve reviewed your family’s finances – and maybe consulted with your college savings account administrator – you can decide what’s best.

If you’ve set money aside to pay for your child’s college education, it may make sense to use those savings now for their intended purpose, as there may be tax benefits for doing so. Besides, borrowing means you’ll be paying interest, which increases the total cost of education. Why pay more than you have to? And if you wonder if taking on educational debt now may help you qualify for more financial aid next year, the short answer is no. Educational debt – or any kind of consumer debt – has no impact on the financial aid formula.

With that said, it can be scary to take large chunks out of your savings after spending years building it up. Whether you’ve saved a little or saved a lot, there’s no one right way to use your savings to pay for college. Your strategy will depend on how much you’ve saved, how long you want your savings to last (4 years? 5?), and any special circumstances you expect.

Some families divide their savings equally over all four years. Others use more savings up front to minimize the number of years interest will accrue on deferred loans. Does your son or daughter plan to do an internship or semester abroad? You may want to set aside something extra for that time. And if you have younger children as well, don’t forget to consider how you’ll help cover their costs when the time comes.

Contact your savings plan administrator to find out how to disburse your savings.

Once you decide how much savings you want to use this first year, something else to consider before borrowing is how you can use an interest-free monthly payment plan.  Most colleges have a plan and can give you the information about spreading out payments over nine, 10, or 12 months.

If you need to borrow, make sure you compare options to be sure you are getting the loan that is right for your needs. Here are some things to consider:

Start with Federal Student Loans:  Federal student loans feature a unique combination of benefits. They are guaranteed with a fixed interest rate, can be consolidated, and offer multiple repayment options. Work with the college financial aid office to make sure you are maximizing all federal student loan options before you look to other financing.

Don’t Borrow More than You Need:  Review your bill or estimate your balance due. Pay what you can from savings, then ask your college if they offer an interest-free monthly payment plan to split the balance into smaller installments. Only use loans as a last resort.

Don’t Borrow More than You Can Afford:  Find out from the lender what interest rate you qualify for, what your monthly repayment will be, and the total cost of the loan. Remember to plan ahead; if you expect to borrow again for future years in college, your cumulative costs are likely to increase substantially.

Pay Attention to Fees, Terms, and Conditions:  Read the fine print for additional fees, which can boost the APR and increase your overall cost of borrowing. Selecting immediate repayment, choosing a shorter repayment term, or having a co-borrower might lower your interest rate. Find out if there are hardship or forbearance options if you encounter financial difficulties during repayment.

Get the Advice and Support You Need:  Education loans and lenders aren’t one-size-fits-all. Read the fine print and if you don’t understand something, ask for an explanation. Look for a lender that is transparent about its programs, will help you choose the right loan product for your financial situation, and provides helpful answers when you need them.

About the Author:
Julie Shields-Rutyna is the Director of Early College Planning at MEFA, the Massachusetts Educational Financing Authority. MEFA, the state non-profit authority on college financing, provides information and guidance to families on planning, saving, and paying for college and is the agency that offers the Massachusetts 529 Plan, the U.Fund. Julie works at all stages of the college planning process helping families develop strategies to meet the costs of higher education. Julie is a frequent presenter on the state, regional, and national level.