This article was originally posted in June 2016 and has been updated in December 2023, to reflect new changes.

Getting a child through college has become an American anxiety.  The rising cost of college has made attending challenging even for families with good incomes.  But the 529 college savings plan is flexible enough that if everyone pitches in, college can still become a reality.

College is expensive.  According to The College Board, in 2023 the average annual costs for an in-state public school was $28,840.  This included tuition, fees, books and supplies, transportation, and room and board.  The cost for the same at the average private school was over twice that at $60,420.  Since 2010, the average tuition of college has risen by an average of 12% per year. educationdata.org

Chart by RSWA. Source: The College Board

Federal and state grants have not kept up.  And the Great Recession and the pandemic forced many states to cut budgets and reduce assistance making matters worse. Families have had to pick up the slack by taking on more loans and work study jobs, but planning ahead and saving can be a huge help. Enter the College 529 plan.

529 plans were created to help save for college.  There are no income limitations, high contribution limits, no age restrictions, and flexibility.  Contributions are not deductible, but investments grow tax-free as long as they are used for college expenses and even up to $10,000 can be used towards private K-12 school tuition expenses.

529 assets are also controlled by the parent/adult/owner.  The parents (or owner) even have the option to move assets from one child’s plan to another.  This is helpful if a child does not go to college or for any reason the parents deem necessary.  Additionally, the asset is considered the parents and not the students.  That is beneficial when applying for financial aid.

Parents, grandparents, aunts, uncles, etc. can open a 529 for each child no matter their age but the earlier, the better.  You can start by looking at your own state plan, but that is not your only option.  You can choose any state’s plan.  Usually, states will offer tax breaks as incentives for residents to choose their own state plan.  But you are a free agent and can shop around.  Look for plans with low fees and solid investment track records.

Even small amounts contributed on a monthly basis add up with compounding over time.  The earlier you start, the more the compounding can help.  Contribution limits are high for 529s.  But even those with the means usually contribute no more than the annual gift tax exclusion of $18,000 per person or $36,000 for married couples.  Most plans also offer the ability to gift 5 years at once without triggering estate tax issues. This acceleration equals $90,000 per individual or $180,000 per couple.   But most parents can’t contribute anywhere near those amounts with their other financial obligations.  So, hello grandparents and family!

Many grandparents are looking for ways to help their grandkids.  And helping with college is a positive investment in the child’s future.  It also helps the parents.  It’s a win-win-win.  Grandparents can send contributions to the parent’s account set up for the child.  The parent controls the account since it’s in their name so if the grandparents want more control they can set up their own.  They can gift the same amounts including the 5-year acceleration of $90,000 each for a total of $180,000.  It is also possible for other relatives and friends to get in on the act.  Contributions can be sent to the 529s to celebrate birthdays and holidays or just to help out.

There are some limitations to what 529 funds can be used for, and investment options can be limiting.  Some rules to be aware of before starting to pay college expenses using funds from 529s include what is an eligible expense and how does it affect financial aid.  So it’s best to consult with an advisor with knowledge of the rules.

529 plans are a great way to accumulate assets to pay for college.  And they are convenient for grandparents, family, and friends to help out.  And with the costs of college continuing to rise, it may take a village to help students get that degree!

Please contact your RSWA Wealth Advisor with any questions you may have about this article or your portfolio. Feel free to forward the article to anyone who may find it helpful.