Fellow Wealth Warriors, May 29th has been nationally recognized as 529 Plan Day. 529 Plan are a tax advantaged way to save for college expenses.
Having some recent experience with paying our own child’s college. I can attest that it is certainly possible to pay for college without borrowing money, but it does not happen on accident. I didn’t necessarily start out with a goal to pay for their college without borrowing money, but the changes that we made in how we handled money helped to make it a possibility to achieve.
Factors to Facilitate Paying for College
We had used 529 accounts to save for college over the years, but it was not nearly enough to cover all of their college expenses. The plan had to include other factors that we needed to do to make it a success.
- College Selection – the choice of college plays a big factor in the cost of college. Public college vs. Private college, In-State College vs Out-of-State college, as well as live at home vs living on away at college, and 4 year college vs. Community College. These are all choices that may significantly impact the cost of college and choosing wisely can help pay for college without borrowing money.
- Four years and Done – Completing college in four years or less. Set the expectation at the beginning that the student needs to finish the degree in four years. Work with the student on class selection and degree requirements can help ensure they meet all of the requirements to finish in four years.
- Work – Have the student help contribute by working during the school year if possible and during the summer. Any amount that they can help cover living expenses or other college costs will reduce the amount needed from other sources. It also helps them by having them participate in the costs of college.
- Sacrifice – sacrificing your wants to ensure that you don’t borrow money may need to happen leading up and while paying for college. These sacrifices may be no or limited vacations, continuing to drive older cars, and living a more conservative lifestyle.
Of course, the field of study is important as it needs to be a degree that is applicable in the market place. The field may also impact the length of education needed to go into a particular field.
Benefits of 529 Plans
- Tax preferred savings accounts – contributions to 529 accounts are made with after-tax contributions. The growth or earnings in the 529 are not taxable when withdrawn if the funds are used for eligible college expenses.
- Eligible college expenses that 529 funds can be used to pay for include tuition, fees, books, room and board
- Some states allow a deduction on state income taxes for contributions made to 529 plan. Some plans only require the funds to be in the 529 account for 7 days before they can be withdrawn to pay for college expenses. This may allow someone that hasn’t saved much for college in 529 accounts to get a state income tax deduction.
- 529 funds may be able to be transferred to the accounts of other family members if one family member doesn’t use the funds.
- Contributions to 529 plans are considered a completed gift and are not included in the estate of the account owner. So it could have estate tax implications.
- The maximum annual amount of gifts to 529 accounts is limited to the annual gift tax limits, which is $15,000 in 2020 per individual. So if you are married you can contribute up to $30,000 per child.
- There are special provisions for contributions to 529 plans that allow for a lump sum gift of up to 5 years of advanced contributions. So an individual can contribute $75,000 and couples $150,000 under the Lump Sum gift rules.
529 Plans can be an effective tool to help pay for college and they have some unique tax and estate planning benefits, but the other factors such as college choice, work, 4-year degree, and sacrifice shouldn’t be overlooked.
Fellow Wealth Warriors, I hope that you use the information provided as motivation to investigate more about paying for college without borrowing money in your fight to build wealth.
Take care and stay healthy fellow Wealth Warrior.