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- The Secure Act passed in 2019 made two big changes to 529 plans, and they’re now more flexible than ever before.
- These state-specific college savings vehicles used to be limited to spending on college and qualified education expenses.
- Now, students can use money from a 529 plan to pay for technical school or an apprenticeship instead of only college.
- The higher-education investing account can now be used after schooling ends, too, allowing students to use remaining balances to pay off student loans.
- Read more personal finance coverage »
College costs are a huge concern for Americans.
The average cost of college in the US for the 2019 to 2020 school year rose 3.4% from the previous school year to $36,880, according to College Board. As college costs continue to rise each year, a regular savings account won’t help keep pace.
“It’s so important to save and get out of that student loan debt issue that keeps growing and growing,” says Paul Curley, director of savings research at ISS Market Intelligence. A 529 plan — a tax-advantaged investment account used solely for higher education costs and issued in each state — might help make college expenses less painful.
Over many years, these plans can help money grow through investing and help families save more over time than they could in a savings account. But, prior to 2019 legislation, a 529 wouldn’t cover expenses for someone who chose an education path other than college without incurring a penalty, nor would it help students cover loans if the money wasn’t used during college.
The Secure Act, which became law in December 2019, made changes to the American retirement system, as well as other investment accounts like 529 plans. There are two major changes that make it a more flexible and helpful account for families.
529 plans can now pay for college, technical school, and apprenticeships
Until the Secure Act, opening a 529 plan meant assuming your child would go to college.
Funds could only be used for expenses at two- and four-year colleges and universities. If your child chose to attend a technical school or do an apprenticeship instead of college, it wasn’t considered a qualified expense, and any withdrawn funds would involve penalties.
With this requirement, a 529 plan seemed like a risky move to some parents. College enrollment and trade school enrollment have become nearly equal in recent years: 16.9 million Americans enrolled in college in 2016, while 16 million Americans opted for a trade school program in 2014, as reported by Meg St-Espirit for The Atlantic.
Now, any type of higher education expenses are qualified expenses with no penalty, including technical schools, trade school programs, and apprenticeship costs. The Secure Act’s changes to 529 plans allow for more education-seekers and their parents to benefit.
You can use 529 funds to pay for college debt
Among Americans who do choose college, debt is all too common. About 69% of students took out loans in 2019, averaging $29,800 borrowed per student, according to Student Loan Hero. Sometimes, even people with 529 funds on hand choose to take out student loans.
There are three times a family might want to use 529 funds to pay loans instead of paying costs upfront:
If the 529 compromises the student’s financial aid qualifications
In some cases, it’s best to leave the funds until after graduation, or after the FAFSA is filled out for the last time in the student’s sophomore year. This is especially true if the 529 plan is owned by someone other than a parent. A 529 plan can be opened by a child’s grandparents or non-custodial parents, but the FAFSA will count these assets in your family’s ability to pay for college very differently.
A parent’s 529 contributions are counted as an asset by the Free Application for Federal Student Aid, but the expected family contribution will only rise by 5.64% of the value of the account. But, 529 plan distributions from anyone other than parents isn’t counted by the FAFSA as an asset, and is considered a child’s income instead. Of children’s income, 50% is added to the expected family contribution, lowering the amount of need-based aid available. In situations like these, leaving the money until graduation could mean more aid and smaller college costs.
If you’re planning to fund multiple educations
Or, for families with multiple children and multiple plans, the funds can be transferred within the family. If one child uses less money than anticipated for college and another spent more and took out loans, the funds from a 529 account can be used to pay off student loans after college.
If the plan has recently lost significant value
Curley points to one more reason to hold off on using a 529 plan: a sudden stock market drop. “Say the market goes down 20% this year,” he says. “The investment was $10,000, and it went all the way down to $8,000. We think that in the course of a year, it’s going to go back up to $11,000,” he says. Instead of using the funds, taking a student loan may buy the markets time to rebound.
“Borrow the $10,000, and it may be $10,250 later,” he says, factoring in interest. “When everything turns back to normal, pay it off.” In this scenario, the family then has $750 left over instead of owing $2,000.
Giving 529 plan holders the option to use the funds to repay student loans penalty-free “allows more levers for planning,” Curley says.
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