About 45 million Americans are currently saddled with student loan debt. That’s 1 in 7 Americans according to a census analysis done in January 2022. [i] As young adults are starting their careers, student loan debt can be a millstone stalling them from building their wealth. Student loan debt prevents them from saving for retirement, buying homes, etc.
As this next generation of young adults starts to have children of their own, some are seeking to find ways to alleviate the burden of student loan debt for their childrens’ futures. As we touched upon in a prior article, the burden of student loan debt can be significant; especially when the average cost of college tuition in the United States in 2021 was $35,720 per year. [ii] Research shows that only half of the 72% of parents who have started saving for their children’s education have opened a dedicated account. [iii] These parents and/or grandparents are missing out on significant savings – their dollars could go much further by using these tax-advantaged college savings plans.
Below is a breakdown of the features of each College Savings Vehicle: [iv]
| 529 Plan | Coverdell Education Savings Account (ESA) |
|---|---|---|
Overview | A 529 is a state sponsored plan that offers tax-advantaged investments to cover the cost of post-secondary education. Each state offers their own plan with its unique costs, investment selections, and features. However, you can open a 529 account in any state that offers benefits that fit your family’s needs even if you don’t live in that state. | Coverdell Education Savings Accounts are tax-advantaged investment accounts that allow you to save for qualified elementary, secondary, and college expenses. |
Maximum Contribution | Each plan establishes its own contribution limits with the max contribution as high as $300,000 per student. | You can make contributions up to $2,000 per year from the beneficiary’s birth to 18 years of age. |
Tax Implications | Some states offer tax deductions for contributions to 529 plans. Withdrawals for qualifying education expenses are not taxed. | Contributions are not tax deductible; the contribution is considered a gift. Withdrawals for qualifying education expenses are not taxed. |
Impact on Financial Aid | Funds are considered assets of the parent/account owner and are factored into the FAFSA equation. | Funds are considered assets of the parent/account owner and are factored into the FAFSA equation. |
Qualified Expenses | Funds can cover tuition, fees, books, computers, other supplies, and room and board – as long as the student/beneficiary is enrolled at least part-time. | Funds can cover tuition, fees, books, computers, other supplies, and room and board – as long as the student/beneficiary is enrolled at least part-time. |
Income Restrictions | None. | Contributors must have less than $190,000 in modified adjusted gross income ($95,000 for single filers) in order to qualify for a full $2,000 contribution. |
Investment Options | Depending on the 529 plan you select, there is flexibility to choose from a variety of investment portfolios or some plans direct funds into a single portfolio. | You can choose from the selection of investments within the ESA portfolio. |
Eligible Institutions | Funds can be use for K-12 tuition up to $10,000/year and Post-Secondary qualified expenses beyond tuition. | Funds can be use for K-12 tuition up to $10,000/year and Post-Secondary qualified expenses beyond tuition. |
Withdrawal for Non-Education Expenses | If you choose to withdraw funds for non-education expenses, you will be subject to federal tax and a 10% penalty on the earnings portion of the withdrawal. [v] | If you choose to withdraw funds for non-education expenses, you will be subject to federal tax and a 10% penalty on the earnings portion of the withdrawal. [v] |
What if the beneficiary decides to not go to college, gets a scholarship that covers the full expense of college, or has leftover funds in the 529 account?
Parents worry about saving into an education specific account because they’re not sure if their child will go to college, what scholarship they may receive, or if they’re savings too much into this specific bucket. You have the option of changing the beneficiary to yourself or any of the following qualified family members without tax consequence or penalties: [iv]
Spouse
Son, daughter, stepchild, foster child, adopted child or a descendent
Son-in-law, daughter-in-law
Siblings or step-siblings
Brother-in-law, sister-in-law
Father-in-law, mother-in-law
Father or mother or ancestor of either, stepmother, stepfather
Aunt, uncle or their spouse
Niece, nephew or their spouse
First cousin or their spouse
Helping to fund your kids’ and/or grandchildren’s education is an incredible opportunity to encourage them to pursue knowledge without the burden of student debt and for you to build a Living Legacy. If you need guidance on how much you should be saving based on your college funding goal and the age of your child and/or grandchild, you can reach out to schedule an introductory call. We can run a complimentary, customized college savings calculation for your particular situation.
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[iii] https://www.fbfs.com/learning-center/infographic-find-the-right-college-savings-plan-for-your-family
[iv] https://www.fbfs.com/learning-center/infographic-find-the-right-college-savings-plan-for-your-family
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