Recent statistics indicate that the cost of a college education continues to soar. According to the College Board, the average budget for one year of education at a public university is around $25,000 (including tuition, fees, books, room and board and other living expenses). At a private college, this soars to nearly $51,000.
Fortunately, Section 529 college savings plans are available to help families with this financial burden. Surprisingly, though, many Americans are not aware of 529 plans. According to a survey conducted by Edward Jones, nearly 75 percent of Americans have no idea what a Section 529 plan is.
Even among those who are aware of Section 529 plans, there are a lot of misunderstandings and misconceptions. Here are 5 myths that are commonly associated with 529 plans:
Myth 1: Our kid has to go to college in the same state where the plan is established.
Fact: Most states have at least one Section 529 plan, and students are free to attend college wherever they please, no matter where a plan is established.
You can apply your 529 funds to almost any college as long as it is eligible for Title IV federal student aid. This includes not only traditional four-year colleges and private universities, but also trade schools, graduate schools and community colleges.
Be strategic about where your kids go to college. Even though most states have some type of 529 plan, some states offer a special tax break. In Kansas and Missouri, for example, you can deduct 529 contributions from your state income taxes even if you contribute to another state’s 529 plan.
Myth 2: We will lose financial aid if we have a 529 plan.
Fact: Unfortunately, this myth holds many parents back from saving money in a 529 plan. Nearly half (44%) of parents think having a 529 plan will negatively impact their financial aid eligibility. In reality, while you could lose some financial aid benefits, it’s usually not much.
Since Section 529 plans are considered a “parental asset,” they have a minimal impact on financial aid – 5.6 percent is the most schools can deduct from need-based aid. Therefore, if you have saved $10,000 in a 529 plan, the most your need-based aid could be reduced by is $560.
Myth 3: Our money will be forfeited if our kid gets a scholarship.
Fact: In most cases, you will pay a 10 percent penalty and income tax if you make a non-qualified withdrawal from a Section 529 plan.
However, if your overachiever kid qualifies for a scholarship, this is considered to be a special exception and the 10 percent penalty will be waived. Note that you still must pay income tax on the withdrawal.
There are several other special exceptions that waive the 10 percent penalty, such as if your child dies or becomes disabled or decides to join the military instead of go to college.
Myth 4: Students can’t open their own 529 accounts.
Fact: Anyone, whether parent or student, can open and contribute to a Section 529 college savings plan. So if your kid is working while going to school and wants to help out with college expenses, he or she doesn’t have to miss out on the benefits of this savings plan.
Other family members can also contribute to 529 plans. So if grandma or grandpa wants to help out with college savings, it’s easy for them to do so. Getting other family members involved in saving can help you meet your college saving goals.
Myth 5: Since there is a penalty on non-qualified withdrawals, you can only use 529 funds for college tuition.
Fact: You can use this money on a wide range of college-related expenses, not just tuition. After all, tuition isn’t the only goliath when it comes to college costs — there are still textbooks, supplies, dorm or apartment rent, groceries, etc., to worry about.
You can use your 529 savings on these and lots of other everyday living expenses your kids face while in college. As long as the money is used on things that are college-related, it won’t be subject to the penalty.
Please contact us if you have more questions about Section 529 college savings plans.