Financial wellness and planning
November 16, 2021
College savings accounts such as 529 plans are a great way to save and pay for a student’s education expenses. For most families, though, accumulating enough 529 assets to fully cover these costs is not a realistic scenario.
In an updated Financial Planning Perspective, Tackling the tuition bill: Managing higher education expenses, Vanguard’s Jonathan Kahler and Maria Bruno explore the key factors families should consider when paying for a college education.
“Maximizing aid and minimizing taxes are crucial,” Jonathan said. “What we provide in this paper is a framework for doing that.”
The authors recommend three actions:
Spending decisions and parental and student income and assets can all affect a student’s eligibility. And sometimes income and assets are not easily classified. For example, distributions from a grandparent-owned 529 are considered student income, while 529 savings owned by a dependent student are considered parental assets. In general, income tends to reduce need-based financial aid more than assets do.
Notes: Asset and income categories and how they affect aid eligibility are based on FAFSA methodology. Schools requiring the CSS/Financial Aid PROFILE application may account for additional assets and determine financial needs according to alternate methodologies. Coverdell ESA refers to Coverdell Education Savings Accounts, UGMA savings refer to Uniform Gifts to Minors Act accounts, and UTMA savings refer to Uniform Transfers to Minors Act accounts.
Sources: Vanguard calculations, based on information from the U.S. Department of Education and the College Board.
The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit can substantially lower the net cost of college for many lower- and middle-income families. The AOTC can be worth as much as $2,500 per student per year. For higher earners, monitoring the tax impacts of spending from various account types may be more important.
Once a family understands the costs, they must have a strategy. Their plans should:
To illustrate how this process works, the authors include a case study that shows how a typical family might benefit from such a plan.
“The role of 529s and other traditional college savings accounts should be considered against the broader backdrop of a family’s financial situation,” Jonathan said. “A good plan can maximize the benefits of these accounts and ensure that these assets are deployed in a way that meets college spending needs as effectively as possible.”