When parents or guardians to save for a child’s college education, they use a 529 account. But what if you’re a college student in college or planning to go back to college? Can a 529 savings account help you pay for your education?
Here’s a look at whether getting a 529 account for your education is worth it or not.
What is a 529 account?
“A 529 savings account allows you to build an education fund within an individual investment account,” says Ronald Ramsdell, founder of College Aid Consulting Services. “Money you contribute is invested in one or more specific investment portfolios.”
Essentially, a 529 savings account is a tax-advantaged, long-term investment account that can help savings grow at a low cost.
“The point of 529 Plans is to save on taxes,” says Mackenzie Richards, a certified financial planner (CFP) and investment advisor with San Diego County Credit Union. “Some states offer a deduction for contributions, they grow without being taxed, and any withdrawals used for qualified education expenses are also tax-free.”
Why a 529 account might be right for you
You have a high income and want a tax break
“Most students don’t have sufficient enough income where they need to worry about their own taxes,” Richard says. So opening a 529 account to lessen your tax burden when it’s already minuscule from low earnings won’t make sense.
However, Ben Birken, a CFP with Woodward Financial Advisors in Chapel Hill, N.C., says he could see an advantage to using a 529 account if:
- You have a high taxable income
- You live in a state where 529 contributions are tax deductible
“In that case, money that had been earmarked to pay for tuition could be deposited into a 529 Plan in order to earn the tax deduction,” Birken says. Instead of investing funds and leaving them to grow, you’d withdraw them right away to pay for college costs.
But, he notes, “Given the income profiles of most college students, I would think this would be pretty rare.”
You’re saving to go back to college
A 529 savings account can make sense if you’re using it like most parents do: for long-term college savings.
If a college student knows that graduate school is in their future, Birken says a 529 savings account can be a smart vehicle to work toward that dream.
“In this case, the time horizon for education expenses is longer than just an undergraduate experience,” Birken adds. So you’ll have more opportunities to see savings grow. And you’ll probably be working and get greater benefits from 529 tax breaks.
Why a 529 might not be right for you
A 529 savings account could put college funds at risk
“Although college students can certainly utilize 529 Plans for qualified education expenses (think tuition, fees, and room and board, not Ultimate Frisbee entry fees), it may not be the best decision to open one with your high school graduation money,” Richards says.
That’s because, as an investment account, funds in a 529 are held in stocks. And as with any investment, Richards says, “There is always the risk of your account value dropping.”
If such a drop coincides with the timing for when you’d need to withdraw funds, you could lose money.
“Like any investments, 529 Plans make the most sense when you have time to ride out any short-term volatility in the markets,” adds Richards.
Other accounts could be safer
Because of the potential for monetary losses, a 529 account won’t make sense for short-term college savings.
“By the time tuition is due, we suggest that most of our clients exit almost completely out of stocks in their 529 plans,” says Birken. “The risk of a significant decrease in value right when the funds might be needed for tuition is too great.”
If you’re willing to try and eke out some last-minute gains on college savings in a 529, just be aware of the risks.
Even if you choose to move your money into a more stable asset, Richards says, “it is still smart to keep the education money separate from everything else.”
Look for options to save for college besides a 529, such as a certificate of deposit or a high-yield savings account.
You could qualify for less financial aid
Your assets, including a 529 account in your name, will affect your eligibility for aid.
“I recommend families create the account in the parent’s name,” Ramsdell says. “The three formulas colleges utilize to determine how much financial aid a student may receive will assess students’ assets much higher than the parents’ assets.”
You’ll have to list your financial information and assets on your FAFSA. Therefore, a 529 account in your name could lower the amount of financial aid you’re granted more than if your parents held it.
Overall, a 529 account might not be beneficial for most college students. But for students interested in working through college or saving for a degree they won’t start for a few years, a 529 account might be the right choice.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.36% APR (with Auto Pay) to 7.82% APR (with Auto Pay). Variable rate loan rates range from 2.41% APR (with Auto Pay) to 6.99% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
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2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.45% effective May 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.41% – 6.99%1||Undergrad & Graduate|
|2.41% – 7.89%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.38% – 6.81%4||Undergrad & Graduate|
|2.41% – 7.95%5||Undergrad & Graduate|
|2.60% – 9.60%6||Undergrad & Graduate|