As 2019 wound to a close, Congress passed important financial reform legislation known as the SECURE Act. It contains two key provisions that make 529 plans more attractive for families.
529 plans allow families to invest money that can be used for certain college expenses. The primary appeal of the 529 is that earnings on the account are income tax free when used for qualified college costs. There are other benefits, and there are also some negatives when compared to other savings options. However, the tax-free nature of 529 plans has proven to be a wonderful benefit for many families. Full details on 529 plans can be found in IRS Publication 970.
What are the changes that are contained in the SECURE Act?
The first improvement is that 529 money can now be used for registered apprenticeship programs, not just college tuition. This opens up hundreds of career paths that have some upfront costs to employees.
Apprenticeship programs require both on the job training and classroom or education work. This work is directly related to the job, not to general education. Until now, 529 plans could not cover these costs as qualified expenses. Now, if the apprenticeship program is approved through the Department of Labor, the costs may be covered as qualified expenses.
This is a welcome recognition by Congress that not every job needs a four-year college degree. According to the National Skills Coalition, middle-skill jobs make up the largest part of America's labor market. Information about specific job openings and career paths in Virginia can be found at the very helpful Virginia Department of Labor and Industry website: https://www.doli.virginia.gov/
The second improvement concerns the hot topic of student loans. Before these changes, the definition of qualified college costs did not include the repayment of student loans. This never made any sense. Fortunately, Congress has corrected that flaw, but only partially.
The SECURE Act allows for up to $10,000 of student loans to be considered a qualified expense. This is a lifetime limit, and it is per beneficiary.
For parents with multiple children, you can easily change beneficiaries to spread the money around and keep within the $10,000 limit per beneficiary. It should be noted that if any of the 529 money is used to repay interest on a student loan (as opposed to principal), that interest portion cannot also be used for the student loan interest deduction.
This new benefit can help with grandparent-owned 529 plans too. Here's how. Since grandparent-owned 529 plans are not reported as assets on the FAFSA, any distribution from them to pay for college must be reported on the FAFSA as Untaxed Income, and that has a very harmful impact on Expected Family Contribution (EFC) and financial aid.
However, if the grandparent waits to make the withdrawal until after January 1 of the student's sophomore year in college, the withdrawal will not be picked up by the FAFSA because of the way the timing works.
By the way, this timing of "what year income counts on what FAFSA" is very confusing, and we offer a free Financial Aid Calendar for our readers - you can get yours by clicking here.
Back the to the 529 plan - since the grandparent is waiting to distribute the 529 proceeds, the grandchild's college costs will need to be covered from another source. Using this strategy, the student borrows up to $10,000 through Direct Loans from the federal government for freshman and sophomore years. Then, when the timing problem is out of the way after January 1 of sophomore year, the grandparent can use part of the 529 to repay those outstanding student loans, up to $10,000 per beneficiary.
There is no negative impact to the family's EFC on the FAFSA by using this strategy. And that's just one way that 529 plans can help cover college costs!
In 2018, Congress expanded the use of 529 plans to include up to $10,000 per year for private K-12 education. With the addition of these 2019 changes, 529 plans are a sensible investment option for more families.
We help families figure out how to maximize financial aid and minimize out-of-pocket costs for college. If you'd like to hear more about how College Funding Group can help your family's situation, please contact us.