529 Plans and College Panning Strategy
It is no secret that the cost of college has risen astronomically in recent years with no sign of slowing, even considering the all-encompassing ripples that the pandemic caused in our lives. Pandemic aside, planning for college has maintained a significant facet of sound long-term financial planning. May 29th is considered “College Savings Day” in some circles, meant to highlight the importance of planning for college considering the rising costs of education and the benefits of being proactive in doing so.
5/29 is College Savings Day because a primary vehicle for saving for college is a 529 Plan. These plans allocate assets to portfolios in familiar investment strategies including mutual funds, with many also utilizing strategies most prevalent in target date funds, whereby the investment strategy becomes more conservative or focused on fixed income investments as the maturity date approaches. For target date retirement funds that date would be indicated by the retirement year, for 529 plans the date would be the prospective year that a student would begin college and assets in the plan begin to be used. The primary benefit of a 529 plan is the tax advantages that accompany - qualified withdrawals from a 529 are tax free. So long as funds are used for education expenses, the earnings are not taxed on federal or state levels.
There are many ancillary costs involved with higher education, so using IRS publication 970 as a guide to qualified use of funds is imperative. Of course, tuition is qualified, but also “related expenses” such as “student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees
and expenses must be paid to the institution as a condition of enrollment or attendance. [1]
Although for some the true benefits of college were called into question as a result of the pandemic, data shows that the long term earnings potential of those who obtained a bachelor’s degree outweigh those whose highest level of education was a high school diploma. According to data from 2019, the US Census Bureau reports that the average annual earnings for an individual with a high school diploma are $39,371, while the average earnings for those with a bachelor’s degree are $73,163. Further, average earnings for individuals who earned a professional degree are $152,703. [2] Looking at unemployment rates as a result of the pandemic also reveals the protection on a broad scale that higher education resulted in; those with less than a high school diploma experienced unemployment at 9.8%, the figure was 8.1% for those with a high school diploma only, and 4.2% unemployment for individuals with college or greater degrees. [3]
There is nothing definitive about the likelihood of college tuition costs continuing to rise indefinitely, or at least at a similar pace, and there is no way to definitively know that your children will in fact choose to go to college. In many cases however, considering a 529 plan is prudent in an effort to confront tuition inflation with a diversified portfolio that has tax advantages, especially when the rising costs of tuition are compared to the inflation of other goods and services within the same specified time range.
Below are some rising costs of a handful of goods and services, according to the Bureau of Labor Statistics’ Consumer Price Index since 1983:
Clothes: 20%
Cars: 48%
Housing: 181%
Medical Care: 435%
College Tuition: 822% (Or an average annual increase of 6%)[4]
Covering the costs of college may not align with the expectations that families have, which should be understood leading up to enrollment. It may be a difficult reality to face, but a smaller percentage of the costs of college are covered by grants and scholarships than many families anticipate. According to Sallie Mae in How America Pays For College, in 2020 families expect scholarships and grants to account for 41% of the total cost of college, and 37% of costs to come from investments and family income. The breakdown of how families actually pay for college looks a lot different. 26% of costs are attributed to grants and scholarships, and 52% of costs come from investments and income. The remainder of costs, student loans, are almost in line with expectations and reality - at 22% of expected coverage versus 21% of actual coverage. [5] This reality further emphasizes the importance of ample saving and investing for college, and a cognizance of the expense breakdown should be understood by a prospective student as a reminder of the sacrifices many families make in order to send their children to school.
Diversification in a 529 allocation remains as imperative as any other investment portfolio, the defined and typically shorter lifespan of a 529 account before drawdowns for qualified expenses does not reduce or eliminate the benefits of diversifying across sectors, geographies, and market capitalization. The investing hallmark of diversification can be succinctly described as “exposure to a broad range of sectors and geographies that may reduce downside capture as sentiments change, rebalancing periodically. The goal is to establish an opportunistic, all-market, all-weather due diligence provider and portfolio manager. Through our investment and portfolio recommendations, we aim to avoid downside and capture upside. To this end, we are conservative when markets are tough and aggressive when they are rising. Though a very broad investment mandate, we believe this is the only way to effectively provide recommendations.” [6]
Loan repayment remains a crucial variable to understand before taking on debt to go to college, but considering the future salary potential that college graduates earn in comparison to those with high school diplomas, pursuing a degree is typically the more prudent route in many scenarios. There are also intangible benefits to attending college that for many, help in justifying the cost. College for many is the first sense of independence in a young adult’s life, it also introduces one to new surroundings and many people of differing backgrounds. Networking opportunities and the emphasis in carving out a path for one’s career and viewpoints are also both prevalent benefits of earning a degree. Conclusively, ensuring a clear path for your children or grandchildren to attend college through the useful vehicle that is the 529 plan is worth exploring if you have not yet established a plan for funding future college tuition and expenses.
Disclosures & Sources:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Content in this material is for general information only and is not indebted to provide specific advice or recommendation for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Prior to investing in a 529 Plan investors should consider whether the investor’s or beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
The Financial Consultants at Vintage Wealth Advisors are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice and financial planning offered through Financial Advocates Investment Management, DBA Vintage Wealth Advisors, a registered investment advisor. Financial Advocates Investment Management, Vintage Wealth Advisors, and LPL Financial are separate entities.
2) US Census Bureau, JP Morgan Asset Management - College Planning Essentials, pp. 4
3) US Census Bureau, JP Morgan Asset Management - College Planning Essentials, pp. 6
4) Bureau of Labor Statistics, Consumer Price Index Data
5) Sallie Mae, How America Pays for College, 2020
6) LPL Research Strategic Asset Allocation Primer
