How to Make the Most of Your 529 College Savings Plan

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If you start early enough, socking away money in a 529 college savings plan is one of the smartest ways to offset the rising costs of tuition.

Parents who open a college 529 plan (named for its IRS code number) for their child’s future education can get tax-free earnings. This, in turn, can lead to borrowing less in federal and private student loans.

Contributing to a 529 plan is quite straightforward — just open an account, name your beneficiary and start depositing at will.

Tapping into it, however, isn’t quite as simple as withdrawing money from a checking account to reimburse your tuition bill. You’ll need to avoid state-specific rules and other fees that weaken your earnings, and ultimately, affect your ability to make the most out of a college 529 plan.

How well do you know your 529 college savings plan?

Don’t forget some of these specifics if you’re looking to maximize your 529 savings plan returns.

1. There is more than 1 type of 529 plan

A prepaid tuition plan allows savers to purchase units on a credit-based system to put toward tuition and fees — but not secondary expenses such as room and board — once it’s time to start living on campus.

Prepaid plans allow you to lock in today’s tuition prices at eligible colleges and universities. If a tight family budget and the amount of student loans you may borrow are priorities, this plan is likely a better fit than the standard 529 college savings plan. Always check to see which universities participate so your dollars will count.

There’s also the more well-known college savings plan where your money can be invested in a variety of ways and compound interest over time. Withdrawing funds from your 529 college savings plan is easy: Generally, you can have a check made payable to either the account holder, beneficiary or school. (However, consult with the college or university since some schools may differ.)

2. Evaluate the best 529 plans by state

Prepaid or standard, 529 plans are established and sponsored by states. But they may differ depending on where you live. More than 30 states offer tax deductions and breaks on 529 plans, though several don’t, so confirm this before you begin investing. Residents of six states — Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania — are lucky enough to be able to invest in any state’s 529 plan and get full tax benefits.

Prepaid plans stop short of covering academic costs beyond tuition and fees, so always check first to ensure your other savings will be enough to take care of out-of-pocket costs before pursuing student loans. When choosing the best 529 plan, research plans outside your home state’s offering for a fair comparison.

3. Not all 529 college savings plan distributions are created equal

The money you invest in a 529 plan will grow without being federally taxed. But not every 529 withdrawal is eligible for a tax break. For instance, tax-deducted 529 proceeds can’t be used toward education-related tax credits on your tax return, like the American Opportunity Tax Credit or the Lifetime Learning Credit. Likewise, you won’t be able to claim deductions on tuition and school fees if you used tax-free 529 money to pay for them.

529 proceeds also don’t cover certain unqualified college expenses, like transportation — even if it’s an airline ticket to and from campus between semesters. Off-campus commuter students may even have difficulty using 529 money to pay for room and board. To confirm what your 529 proceeds may cover, contact the plan manager and the school and verify what is and isn’t covered. Tuition, books and supplies should be covered universally. Devise a withdrawal plan to make sure your investment is maximized.

4. Watch out for penalty fees

College 529 plans are a lot like individual retirement accounts (IRAs): Withdraw your earnings too soon and you may incur a penalty fee. Specifically, if you take out any dollars before the account beneficiary incurs any qualifying expenses (before your tuition bill is due) or for any non-qualifying expense (such as a medical bill), a 10% penalty can be imposed.

There are some exceptions to withdrawing money early for non-qualifying expenses, including if an account’s beneficiary becomes disabled, dies or receives a scholarship or another type of educational assistance.

Through the House Ways and Means Committee’s Secure Act, however, you may also be able to use a 529 distribution to repay up to $10,000 of your (or a sibling’s) student loan debt. The pending legislation was passed in the House and was awaiting Senate confirmation as of the end of May 2019.

5. Other fees may apply, too

Several fees and ancillary expenses may apply to your 529 savings plan. On a prepaid plan, you’ll likely have to pay enrollment and administrative fees upon withdrawal of funds. College savings plans charge the same, often with the inclusion of an asset management fee, which may depend on the type of investment you have in place.

However, depending on the 529 plan in your state, you might be able to get some of these fees waived if you carry a large account balance or have an automatic deposit plan set up.

6. Don’t withdraw from the wrong 529 account

If you’ve got more than one 529 plan, you’re making a mistake if you withdraw randomly from any account — even the one with the highest balance.

Check your investments and see which ones have the best investment growth rates. Tap into those savings to receive the best tax breaks. Like any investment, gauging a plan’s growth potential ensures that you’ll be earning enough money to contribute aggressively toward college tuition.

7. Don’t pass on 529-based credit card rewards

For 529 donors with excellent credit, consider opening a credit card designed to complement your 529 plan. Some of them will give cash back or other rewards points that can be used toward your investment. These cards include:

  • CollegeCounts 529 Rewards Visa® Card (Alabama)
  • Bright Directions 529 Rewards Visa® Card (Illinois)
  • Upromise® Mastercard®

Some of these cards may not offer the same cashback or rewards percentages and also may not align with 529 plans in certain states, so make sure to read the fine print before applying.

8. Pay careful attention to withdrawal timing

529 withdrawals won’t always qualify for a tax break if you don’t use them for qualifying educational expenses within the same tax year, so make sure your timing is right. Experts recommend keeping detailed records — not only for the IRS, but your own financial activity — since a withdrawal made at the wrong time could compromise reimbursing your expenses.

Remember that there are three ways to withdraw money from a 529 college savings plan:

  • Distributing the money to the account holder
  • Distributing to the beneficiary (most likely the student)
  • Distributing to the school

In this case, itemize and document every single tuition, school supply or related expense in the school year so that your 529 contributions are maximized to their fullest potential.

Also keep in mind that a beneficiary could receive no more than $15,000 in a given year before the IRS could impose a gift tax. Before making a withdrawal beyond that amount, you might ask a financial professional or tax professional about the repercussions.

No two 529 plans are alike, so you should manage yours uniquely. Invest and maintain your account according to the schools you’re considering, what the tuition may be and by locking into the best investments and interest rates available at the time you open.

Don’t sit idle. Monitor your investments and see how they grow over the years. If college is years ahead for you, a child or grandchild, it gives plenty of time to cultivate your 529 college savings plan and watch your money grow into something to keep college affordable.

Andrew Pentis contributed to this article.

Interested in refinancing student loans?

Here are the top 8 lenders of 2019!
LenderVariable APREligible Degrees 
Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.

Earnest Disclosures

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 3.45% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.89% 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 November 21, 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 11/21/2019. 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 hello@earnest.com, or call 888-601-2801 for more information on our student loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 3.46% APR (with AutoPay) to 7.61% APR (without AutoPay). Variable rates currently from 2.31% APR (with AutoPay) to 7.61% (without AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.31% APR assumes current 1 month LIBOR rate of 2.31% plus 0.75% margin minus 0.25% for AutoPay. If approved for a loan, the fixed or variable interest rate offered will depend on your credit history and the term of the loan and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

3 Important Disclosures for Figure.

Figure Disclosures

Figure’s Student Refinance Loan is a private loan. If you refinance federal loans, you forfeit certain flexible repayment options associated with those loans. If you expect to incur financial hardship that would impact your ability to repay, you should consider federal consolidation alternatives.


4 Important Disclosures for Laurel Road.

Laurel Road Disclosures

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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

ANNUAL PERCENTAGE RATE (“APR”)
This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

FEE INFORMATION

There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.

LOAN AMOUNT

For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
For eligible Associates degrees in the healthcare field (see Eligibility & Eligible Loans section below), Lender will refinance up to $50,000 in loans for non-ParentPlus refinance loans. Note, parents who are refinancing loans taken out on behalf of a child who has obtained an associates degrees in an eligible healthcare field are not subject to the $50,000 loan maximum, refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for more information about refinancing ParentPlus loans.

ELIGIBILITY & ELIGIBLE LOANS

Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).

Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.

All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.

For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.

INTEREST RATES

The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.

DISBURSEMENT OPTIONS

The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.

POSTPONING OR REDUCING PAYMENTS

After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.

We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.

We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.

If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of November 8, 2019 and is subject to change.


5 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers.


6 Important Disclosures for CommonBond.

CommonBond Disclosures

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 1.76% effective November 10, 2019.


7 Important Disclosures for LendKey.

LendKey Disclosures

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.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 12/07/2019 student loan refinancing rates range from 1.90% to 8.59% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.


8 Important Disclosures for College Ave.

College Ave Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

1College Ave Refi Education loans are not currently available to residents of Maine.

2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.

4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 12/1/2019. Variable interest rates may increase after consummation.

1.99% – 6.89%1Undergrad
& Graduate

Visit Earnest

2.31% – 7.36%2Undergrad
& Graduate

Visit SoFi

2.21% – 6.21%3Undergrad
& Graduate

Visit Figure

1.99% – 6.65%4Undergrad
& Graduate

Visit Laurel Road

2.43% – 7.60%5Undergrad
& Graduate

Visit Splash

1.85% – 6.13%6Undergrad
& Graduate

Visit CommonBond

1.90% – 8.59%7Undergrad
& Graduate

Visit Lendkey

2.74% – 6.25%8Undergrad
& Graduate

Visit College Ave

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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