You have Options When Requesting Your 529 Plan Funds
Understand your 529 plan disbursement options
If your family saved enough in 529 plan to pay for the entire 4 years of college costs, congratulations. For most others with 529 plans, we celebrate you for saving for your child’s education. According to the College Savings Plan Network, the average 529 plan account is $24,153 in 2018. Knowing that the College Board estimates that in-state tuition, fees and room and board in 2018-19 is $21,370, this means that most families need to think about how they want to time disbursements of their 529 plans.
Perhaps you want to drain your entire 529 funds to pay for the first year of college? Or maybe you wait and use it all for that final year of college? Or perhaps you divide the funds equally over the four years? We suggest that you consider the following when deciding on how to request those 529 plan funds:
Return on Investment
What is so cool about 529 savings plans are that they are tax-free investment vehicle. The longer you leave the money in the 529 plan, the more it grows without taxation. For some, this means that they want to wait as long as possible before using the funds. For others, they want to hedge their bets and evenly disburse the 529 plan funds each academic year so they can still have a portion of the savings grow.
Federal Tax Credit
Since 2009, the federal government has been offering some sort of tax credits to claim for expenses paid for tuition, certain fees and course materials for higher education. Currently, the American Opportunity Tax Credit (AOTC) offers a partially refundable credit for undergraduate postsecondary education expenses.If your modified gross income (MAGI) is $80,000 or less (or $160,000 if you are filing jointly), then the tax credit is worth up to $2,500 for the first $4,000 you spend on qualifying educational expenses. If you think you will qualify for AOTC, then consider ensuring that you are paying for some education expenses through cash contributions or student loans not just 529 plan funds.
Direct Student Loans
The Federal Student Aid (FSA) Office of U.S. Department of Education offers low-interest Direct Student Loans to eligible students to help cover the college costs. They do have limits to the amount a student is eligible to receive each academic year known as annual loan limits. First year students can borrow up to $5,500; second year students can borrow up to $6,500; and third and fourth year students can only borrow $7,500 each year. These are typically the most affordable loans that are in the students name and require no payment while a student is enrolled at least half-time. Many families may want to limit the use of 529 plan disbursements so that your can maximize the use of these funds.
Budget experts for years have encouraged consumers to think about budgets on a monthly basis. For many it is easier to pay a consistent amount monthly, especially for big ticket items like college costs. Stretching the 529 plan funds over four years will help families equalize cash payments from paychecks, borrowing student loans, and maximizing any free money sources.
Whatever your course of action for your 529 plan disbursements, remember that you typically have three options for how to disburse the funds:
- Option 1: Request a check be made payable to the account owner;
- Option 2: Ask for a check made payable to the student; or
- Option 3: Send the college name and student accounts address so the payment can be made directly from the 529 plan to the school.
Option 3 makes it easier to demonstrate that the funds were used for eligible college costs. With option 1 or 2, you just want to clearly show that the funds were used for educational expenses. If 529 plan funds are disbursed and there are insufficient qualified educational expenses, the amount over the qualified educational expenses becomes taxable and faces 10% penalty.
Colleen MacDonald Krumwiede is a financial aid expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Pay4 to transform the way families afford college.