By Charu Gross
Head of Vanguard’s Education Savings Group
May 10, 2016
I love watching my toddler learn. It’s truly rewarding (and often hilarious) to observe his determination when he’s solving a new problem. How do I put these batteries back in the TV remote? How can I get those animal crackers down from the third shelf in the pantry? Uh oh… How do I get back that app I just deleted from mom’s iPad?
What I enjoy most is seeing how undaunted he is by new challenges and how patient he is when finding a solution to a “problem” takes time—and more than one try. As we grow up, it seems that we lose some of our patience. If we know that reaching a goal will take time, we might put it off.
As I’ve talked with friends with similar-aged children, it’s become clear to me that saving for college can seem like a daunting long-term goal—and consequently, it’s often something people put off or avoid completely.
Although it probably will take some time to reach your college savings goals, it’s definitely worth the effort. 529 college savings plans provide great tax benefits and can be used for a variety of higher-education costs. And they’re really pretty simple to figure out.
Below, I’ll debunk some common 529 plan myths in hopes of inspiring you to start saving.
Myth: If we don’t use the money for college, we lose a significant portion of the principal.
Truth: There’s actually quite a bit of flexibility with 529s. If your child decides not to go to college or obtains a scholarship, the money can be transferred without penalty to a sibling or another eligible family member, or even to yourself if you decide to go back to school. And, if you do end up needing to use the money for other purposes, only the earnings portion of the account is subject to a 10% penalty and income tax. The amount you contributed less any withdrawals is not subject to penalty or income tax.
Myth: When I open a 529 account in a given state, my beneficiary must attend school in that state.
Truth: 529 college savings accounts can be used at eligible postsecondary institutions in any state and abroad. If your state’s specific program is a prepaid tuition account, you may want to see if it has in-state school requirements for full coverage of tuition and fees.
Myth: Having money in a 529 account hurts my child’s chances at receiving financial aid more than a bank account would.
Truth: All your liquid savings will likely be assessed as part of qualification for aid. Because 529 assets are considered parental assets, and not your beneficiary’s, they have a relatively minor impact: No more than 5.64% of your 529 savings (versus 20% for UGMA/UTMA accounts or other child-owned assets) is counted in aid calculations.
And, keep in mind that 43% of “financial aid” awarded to students is in the form of federal student loans, so having some savings can reduce the amount your child has to pay back (source: College Board Trends in Student Aid 2015).
Myth: It’s tricky to figure out which state plan to choose.
Truth: Investing in a 529 account doesn’t have to be complicated. Following a few simple guidelines, it’s really a matter of determining which plan suits your needs. First, consider the plan of the state where you live: Some states offer tax advantages for residents. Next, take a look at overall fees and fund costs—the less you pay in fees, the more you save. Other relevant factors include investment options and minimum investment amounts. Many states allow you to open an account with as little as $25. Check out CSPN’s comparative tool to learn more.
Myth: Since my child is already a teenager, it’s not worth it to open up a 529 account now.
Truth: Better late than never. Any amount saved is less you need to borrow to pay for school. Just keep in mind that as your child approaches college age, it’s important to consider the appropriate level of risk to take. Taking on too much risk as a way to compensate for less savings is potentially dangerous because your child will need the funds soon. Many states offer age-based options, which regularly readjust asset allocation, reducing equities as the beneficiary nears college age. These options can help simplify your investment decision.
Notes:
For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
Investment returns are not guaranteed, and you could lose money by investing in a 529 plan.
About the author:
Charu Gross is head of Vanguard’s Education Savings Group, responsible for providing 529 education savings offerings to state and retail clients. She joined Vanguard in 2005 and has worked in several roles spanning Human Resources, Vanguard Advice Services Group, and Vanguard Retail Services where she was head of Voyager Select®, overseeing 200 employees serving clients with assets ranging from $500,000 to $1 million. Charu earned a B.S. in economics from Pennsylvania State University and holds FINRA Series 6, 7, 24, 26, and 51 licenses. Vanguard has several college savings tools available on their website at www.vanguard.com.