Funds Remaining In Your Child’s 529 – Now What? Part 3

We are continuing our affording college series.  The 529 is a popular vehicle for college savings.

How do I prove that a distribution request is for my child’s college expenses and not for some other purpose?

Answer:

All 529 plans have procedures to ensure that a withdrawal is being used for the designated beneficiary’s qualified higher education expenses. Some plans require that the expenses be paid directly by the plan to the educational institution. Others will prepay or reimburse the beneficiary for qualifying expenses paid out of pocket (as long as a receipt is provided). Your plan administrator can tell you what procedures you must follow when requesting a distribution.

Remember, unless you can prove that the withdrawal is used for qualified higher education expenses, federal (and probably state) income taxes must be paid, and possibly a 10 percent federal income tax penalty may apply.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

What happens if my child finishes college and there is money left over in the 529 account?

Answer:

If you withdraw the money that is left over in your 529 account and don’t use it to pay for the beneficiary’s qualified higher education expenses, you’ll have to pay a federal penalty tax of 10 percent on the earnings portion of the withdrawal (a state penalty may apply as well). You may also have to pay federal, and in some cases state, income taxes on the earnings portion of the withdrawal.

However, if you have money left over in your account, withdrawing it and paying a penalty isn’t your only option. All 529 plans allow the account owner to change the beneficiary without penalty (although depending on the plan, there may be a fee for this service). In addition, you may be able to receive a “rollover” distribution from your 529 plan and recontribute the proceeds within 60 days to the same or a different state’s program with a new beneficiary. Keep in mind that in both instances the new beneficiary must be a qualifying family member, or taxes and a penalty will be due.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Are any financial aid programs tailored especially to parents of post ­secondary students?

Answer:

Although the bulk of financial aid is awarded directly to students, one major federal financial aid program is available to assist parents with their share of post secondary (beyond the high school level) educational expenses. This program is known as the Parent PLUS Loan.

PLUS Loans are available to any creditworthy parent of a student matriculated at least halftime in an undergraduate degree or certificate program offered by an accredited post ­secondary educational institution. Graduate and professional students can borrow under the PLUS Loan program too (these loans are called GradPLUS Loans). PLUS Loans are not limited for use only at colleges; they may also be used for post ­secondary vocational or trade program expenses. These loans may be granted by a private lender or directly by the federal government. Completed loan applications are forwarded by the parent to the financial aid administrator of the student’s school for certification and further processing.

The limit that a parent may borrow for any single academic year is the cost of education (which may include tuition, fees, room and board, books, and supplies), minus any other financial aid received. Thus, if the cost of education were $50,000 and the student received aid totaling $30,000, a parent would be eligible to take out a $20,000 PLUS Loan.

The interest rate is fixed for the life of the loan and the rate on new loans is set each June. The current interest rate on PLUS Loans issued for the 2014/15 academic year (July 1, 2014 through June 30, 2015) is 7.2% (up from 6.4% for the 2013/14 academic year). Interest begins accruing upon the first loan disbursement. Disbursements are made directly to the school, usually in two equal installments. Parents now have the choice of making payments while the student is in school or deferring payments until the student graduates.

In most cases, parents will need to file the federal government’s financial aid application, the FAFSA, to obtain a PLUS Loan. The reason is that because a PLUS Loan is a type of federal loan, it must be “certified” (approved) by the college’s financial aid office. If the college requires students to fill out the FAFSA, it will need a FAFSA on file to certify a PLUS Loan. Check with your school’s financial aid office on their policy.

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