529 Plans Demystified

Is The Cost Worth It?

There's been some debate questioning the cost benefit of a four year degree because of the skyrocketing cost of college and the loan burden that this place on students and their families, it's becoming a generational anxiety.

Just for fun, I researched the initial college I attended Southern Illinois University at Carbondale to determine their tuition when I initially attended college in 1984. The cost was $1,307. If you sent your child to SIUC in the Fall 2021, you would be expected to pay $9,638 for the year. 

Now that's an increase of 637% over 37 years. That is 17% per year. This does not include room & board and other education related incidentals. 

I think most would agree that college still has value. The New York Federal Reserve Bank states the average college graduate earned $78,000 a year compared to 45,000 earned by someone with only a high school education based on their analysis. Now that is a 75% premium or $30,000 plus a year. 

Focus On What You Can Control

If you know you want your child to attend college, the only variable you have control over is the ability to plan for the future. Part of that planning may include the 529 Savings Account. 

Helping me break down this educational investment vehicle is Craig Knox a financial professional with more than 20+ years experience in the financial industry. 

A 529 plan is an investment account that offers a tax-free benefits when used to pay for qualified education expenses. 

Qualified Education Expenses

• Tuition and fees (college and K-12)
• Books and supplies
• Computers and internet access
• Room and board (college if enrolled at least part-time)
• Qualifying federal and private student loans (up to $10,000) 
• Apprenticeship programs & trade school

What Happens If My Child Does Not Use The Money For College? 

So if your child doesn't utilize all the money, that money can be transferred to another member of the family.  If even if you, as the owner decided that you wanted to go back to school and get a graduate degree, that's a possibility as well. So it's very flexible. 

Family Members Who Can Use The 529 Plan

• The designated beneficiary's spouse
• The designated beneficiary's son or daughter or descendant of the beneficiary's son or daughter
• The designated beneficiary's stepson or stepdaughter
• The designated beneficiary's brother, sister, stepbrother or stepsister
• The designated beneficiary's father or mother, or ancestor of either parent
• The designated beneficiary's stepfather or stepmother
• The designated beneficiary's niece or nephew
• The designated beneficiary's aunt or uncle
• The spouse of any individual listed above, including the beneficiary's son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
• The designated beneficiary's first cousin

Who Controls The Account?

The account owner controls the account. So unlike a UGMA/UTMA, the child takes over that account at 18, but in a 529 plan, whoever opens the account maintains control over the account through its lifetime.

What Happens If My Child Receives A Scholarship? 

If your child gets a scholarship, you may withdraw the exact amount of the scholarship from the  529 plan and use it for anything without incurring a penalty on the earnings, but you would have to pay taxes on taxes on the earnings.

Understanding Compound Interest

Compound interest is interest that is reinvested which earns additional interest. $200 invested over an 18 year period at 7% interest would be $82,274. Determine how much your money can grow using this Compound Interest Calculator.