Categories
Uncategorized

How do 529 plans work?

Many parents and grandparents are confused about 529 plan rules. A 529 college savings plan is an investment account whereyour money grows tax-free if it’s used to pay for qualified education expenses. This includes college costs, as wellas $10,000 per year in tuition expenses at private, public or religious elementary and secondary schools. Unlike othersavings vehicles, there are no income limits, and no time limits imposed. In our Annual College Savings Survey, we presented six true or false questions about 529 rules to visitors of Savingforcollege.com.Click through the slideshow to see where the biggest misconceptions lie!

1. I must use the 529 plan offered by my state of residence – FALSE

  • 20% of total respondents answered incorrectly
  • 18% of grandparents and 21% of parents answered incorrectly
  • You can enroll in almost any state’s 529 plan, no matter where you live, but your home state many offer a state tax benefitsfor residents.

2. If my child doesn’t go to college, I’ll lose the money I have saved in my 529 plan – FALSE

  • 17% of total respondents answered incorrectly
  • 10% of grandparents and 18% of parents answered incorrectly
  • If the beneficiary of a 529 account doesn’t go to college, you canchange the beneficiary or take a non-qualified withdrawal.
  • If you take a non-qualified withdrawal, you will incur income tax as well as a 10% penalty tax on the earnings portionof the account. You’ll never be taxed or penalized on the principal (the amount you deposited) since it was madewith after-tax money.

RELATED: Avoid these 529 withdrawal traps

3. 529 plan savings must be applied toward colleges in the state where the plan is based – FALSE

  • 16% of total respondents answered incorrectly
  • 12% of grandparents and 17% of parents answered incorrectly
  • You can use your 529 savings to pay for almost any post-secondary education, including traditional four-year universities, community colleges, trade schools andeven study abroad programs. As of January 1, 2018, families can also take a tax-free withdrawal of up to $10,000per year, per beneficiary to pay for tuition expenses at private, public or religious elementary and high schools.

RELATED: 529 plans and K-12 tuition 

4. If my child gets a scholarship, I’ll lose the money I have saved in a 529 plan – FALSE

  • 9% of total respondents answered incorrectly
  • 5% of grandparents and 10% of parents answered incorrectly
  • If a student gets a scholarship, non-qualified 529 plan withdrawals up to the amount of the tax-free scholarship willnot be subject to the 10% penalty. The earnings portion of the withdrawal, however, will incur income taxes.

RELATED:The truth about scholarships and 529 plans

5. Savings in a 529 plan are considered when determining financial aid eligibility – TRUE

  • 33% of total respondents answered incorrectly
  • 37% of grandparents and 32% of parents answered incorrectly
  • Funds saved in a 529 plan owned by a parent or student are considered parental assets. When determining a student’s ExpectedFamily Contribution, a financial aid office will count up to 5.64% of parental assets as funds available to pay forcollege (compared to 20% of student assets).
  • Assets in a grandparent-owned 529 plan are not reported on the FAFSA, but when the grandparent makes a withdrawal topay tuition the amount will be reported as student income on the following year’s FAFSA. Income is assessed at 50%.Withdrawals from parent- or student-owned 529 plans have no effect on financial aid.

RELATED:Yes, your 529 plan will affect financial aid

6. My child can never withdraw from the 529 plan without my permission – TRUE

  • 37% of respondents answered incorrectly
  • 39% of grandparents and 37% of parents answered incorrectly
  • Unlike custodial accounts under UGMA/UTMA, the 529 plan account owner (not the beneficiary) retains control of the fundsthroughout the life of the account. The beneficiary has no legal rights to the assets, regardless of his or her age.
Categories
college savings 101

Is It Safe to Get Back into the Stock Market?

After the stock market started dropping on February 19, 2020 due to the coronavirus pandemic, some investors pulled out of the stock market. Other investors remained invested, but shifted their asset allocations to a more conservative mix of investments. When is it safe for these investors jump back into the stock market?

The stock market is never really “safe,” but the recovery began on March 24, 2020, about a month after the start of the bear market. 

Pulling out of the stock market just locks in losses and causes you to miss out on all or part of the recovery. It is better to remain invested than to try to time the market. 

If you blink, the recovery will have already happened and you will miss out on the opportunity to regain some of your losses. If current trends continue, the S&P 500 will be fully recovered in two more weeks and the Russell 2000 will have fully recovered in about a month. 

It took about a month for the stock market to drop by about a third. It will have taken about three months for the stock market to fully recover from the bear market. It always takes longer to recover from a bear market than it takes for the stock market to drop. 

This chart shows the change in investment returns as compared with where the stock market was at the beginning of the year. It graphs the performance of the S&P 500, Russell 2000, the MSCI EAFE Standard Index (Foreign Stock) and the MSCI US REIT Index (Real Estate). 


Categories
college savings 101

How Safe is Money in a 529 Plan during a Pandemic?

529 plans, like other investments in the stock market, can lose money. Investing in the stock market is never really safe. But, stock market investments generally grow to a greater extent than other investments over the long term. 

During an economic downturn, such as the one triggered by the coronavirus pandemic, investments in the stock market will drop significantly, but only temporarily. 

For example, the S&P 500 dropped by a third from February 19, 2020 to March 23, 2020, but has since increased by 43% off of the bottom. As of July 14, 2020, the S&P 500 is just 5.9% short of a full recovery.

(For reference, the S&P 500 closed at 3,386.15 on February 19, 2020, 2,237.40 on March 23, 2020 and 3,197.52 on July 14, 2020.)

Investing in the stock market is like riding a roller coaster. It has its ups and downs, and watching it too closely can cause nausea. 

See also: What to Do With College Savings in a Volatile Market

The best advice is to remain invested. Set up a direct-sold 529 plan with automatic investment and don’t pay too much attention to the ups and downs.

If you are invested in an advisor-sold 529 plan, follow their advice to stay the course. Pulling out of the stock market will just lock in losses and cause you to miss out on the economic recovery. Trying to time the market, especially during a period of increased volatility, just doesn’t work very well.

See also: Should You Dip Into Your 529 Plan in Case of Coronavirus?

If you can’t handle the stress of stock market gyrations, 529 plans offer many investments that are safer, with a lower risk of investment loss. Several 529 plans offer FDIC-insured investment options and money market accounts. All 529 plans offer age-based asset allocations, which shift to a lower-risk mix of investments as college enrollment approaches. 

Consider what happens to an age-based asset allocation that starts off with 80% invested in stocks when the baby is born and gradually shifts to 20% in stocks when the baby is a high school senior. 

  • If the stock market were to drop by 30% when the baby is one year old, the 529 plan will experience a 24% loss. But, there will be very little money in the 529 plan, so the losses are the equivalent of just three months of contributions. You also have 16 years to recover from the losses.
  • If the stock market were to drop by 30% when the baby is a high school senior, the 529 plan will experience just a 6% loss, which may be partially offset by gains in the low-risk portion of the portfolio. That’s not too bad. Although that’s the equivalent of about 1-2 years of contributions, there’s a good chance the stock market will recover before you need to use most of the money. You also have the option of borrowing to pay for college costs while you wait for the stock market to bounce back, and then using the 529 plan to pay off the student loans.

See also: How Will Coronavirus Impact Your College Savings?

Of course, if you invested all of the money in the 529 plan in an all-stock fund, all bets are off. Such a 529 plan will follow the performance of the stock market as a whole, without any attempt to manage the risk of investment loss. The stock market has at least three corrections and one bear market in any 17-year period. A stock market correction is a drop of 10% or more. A bear market is a drop of 20% or more.You may also wish to avoid 529 plan portfolios that are too heavily weighted in real estate or foreign stocks, as these can increase volatility and do not recover as quickly as domestic stocks. 

Categories
Student Loans

How Upromise Can Help You Pay Off Student Loans

With 45 million student loan borrowers working to repay more than $1 trillion in student loan debt, many are looking for ways to help reduce their total bill. One simple way that could potentially help is signing up for a free Upromise account.

Upromise is best known as a program geared towards helping parents save for college. Upromise has a cash back rewards portal for online shopping and a cash back rewards credit card. Users shop through the portal and receive money back on purchases, similar to Rakuten or Ebates. 

While this cash can be deposited into a 529 college savings plan, it can also be sent directly to a checking or savings account, and then used to make extra payments on your student loans.

How to Earn Cash from Upromise

Signing up for Upromise is quick and is free. Here is how you can use Upromise to help earn extra money to pay back your student loans:

Shopping. Upromise lets you earn rewards from online shopping made through the shopping portal. Login to your account, click on a vendor’s offer on the portal, and then purchases will earn cash back rewards to your Upromise account. Cash back offers are typically 1% to 5%, but can be as high as 40% for specific vendors, especially during the holiday shopping season.

You might be thinking: “I have student loan debt; I can’t spend my money shopping!” First of all, way to go on being proactive. You shouldn’t spend money on things you don’t really need. Second, you can use the portal to shop for essentials when needed. For example, earn 2% cash back at Costco, 8% at Sam’s Club and cash back at various grocery stores and wireless carriers. 

There’s also cash back on sites that already offer deals, such as 3% cash back on Living Social or 4% cash back on Groupon. 

If it’s in your budget, there are plenty of other stores based on a variety of categories, including clothing, travel, beauty and health, sports and outdoors, shoes, computers and electronics, and more. 

Even if all you do is direct your current spending through the Upromise shopping portal, you can earn cash back to help repay your student loans. 

Signing up for the credit card cash back rewards. Upromise credit card holders earn 1.25% cash back on purchases made. Here’s the important thing – This is only beneficial if you are paying off the entire credit card balance every month. If you’re willing to make purchases you would be normally making anyways, such as gas and groceries, and pay off the balance in full, then you can use the cash back towards student loan payments. Otherwise, with a balance on the card, you’ll be paying interest (up to 24.99%).

You definitely don’t want to rack up more debt by using a credit card that you can’t pay in full. There are dozens of cash back credit cards available out there, so find the one that’s right for you, if you’re in the market for a new card.

Dining out. You can earn rewards by eating at select restaurants. Purchases made at participating restaurants using a linked debit or credit card will earn 2.5% cash back on your entire purchase (including tax and tip). 

You can search your location to find participating restaurants near you and ones that are best for your budget. Restaurant listings include a dollar sign rating to give you an idea of the price point. For budget diners, stick to the $ (one dollar sign). 

Asking family members to join in. If you’re lucky enough to have a parent or other family member who is willing to help, ask them to join as well. 

Bottom Line

Upromise isn’t the only solution for student loan debt. But since it is free to join, it could possibly help you pay a little extra towards your student loans.

Learn more about Upromise and sign up today.

At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.