How We are Using 529 Plans to Help Pay for College

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How to Help Pay for College with 529 PlansOne of the responsibilities my wife and I take on as parents, is to make sure we prepare our 3 children (ages 14, 10, and 6 as I write this) for their future. We certainly want them to be independent and learn things on their own … but at the same time we need to help steer them in the right direction.

For example, we would like all of our kids to get a 4-year college degree. If that happens to not be the path they want to take, then so be it … but they will need to have an alternative plan instead that we can all agree upon.

In the meantime, we are preparing for the day when each of them enters college.

We still have a few years to plan, but with our oldest child entering high school next year … it won’t be long.

How to Pay for College

Both my wife and I have Master’s degrees and were able to (somehow) graduate with very little debt.

My wife finished her undergrad education in 3 years and was able to take advantage of dual enrollment during her high school years. Her parents had also set aside funds to help her pay for college.

She went on to get a job in her field and eventually earned a Master’s degree … which was paid for by her employer.

I went down a different path and earned my undergrad degree in about 5 years. My parents helped me pay for most of my undergrad education. I was able to fill in the gaps by working during those years and taking out a small student loan … which was quickly paid off.

Years later when I finally decided what type of career I wanted, I was able to earn my Master’s degree which was also paid for by my employer.

We both feel very fortunate to have earned our degrees through – great supportive parents, part-time jobs, employer sponsored programs, dual enrollment, and a small student loan.

Our goal is to help our kids make it through and survive college with very little debt … just like we did.

While we don’t have all the answers just yet … we plan to use a collection of tools and hacks to survive college for our 3 kids with little to no debt. Here is a list that we have started that will help –

  • 529 College Savings Plans
  • dual enrollment
  • part-time employment and summer jobs
  • CLEP Testing
  • AP College Credits
  • house hacking
  • scholarships and grants

As we research and educate ourselves, I am sure this list may grow. It is also possible we take things off the list that don’t apply.

One of the first actions we took as new parents (about 14 years ago) was to open a 529 College Savings Plan for our first child.

What is a 529 Plan?

I am sure most parents in the U.S. have at least heard of a 529 Plan. For those who have not, it is basically a special tax advantaged savings plan that can be used to help pay for college expenses.

According to the SEC“A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”

For more information, check out their article – An Introduction to 529 Plans.

It is important to understand that contributions into the plan are not deductible. However, earnings and not subject to federal taxes as long as they are used for educational expenses.

Here is a better explanation from the IRS“Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible.”

Here is a good article that can answer some questions you may have on this type of investment from the IRS – 529 Plans FAQ.

I would also like to point out that a few things have changed since we opened up our first 529 Plan … over 14 years ago. For example, funds in these plans can now be used to pay for private school from elementary to high school levels.

We won’t be using our plans to help pay for private schooling for our kids … but that is now an option.

Funding Our 529 College Savings Plans

As I mentioned a bit earlier, we opened a 529 account for our oldest son the month that he was born (over 14 years ago). For years, we would invest several hundred dollars per month in the account.

As years passed, his account grew little by little. Then our second son was born and we started a separate 529 account for him (over 10 years ago).

Unfortunately, our monthly expenses grew and our income decreased as my wife began to stay home with the kids. We were still able to invest monthly for both kids, but had to split the investment dollars between accounts.

A few more years passed, and our daughter was born. At that point, we had other priorities and decided not to open a 529 account for her. We had other goals … like building our dividend income stream.

It is not that we don’t plan to help pay for her college education, but rather we are now taking a different approach than simply using 529 Plans.

For the past year, we haven’t invested any new money in our 529 accounts.

At the time of this writing, we have a little over $90,000 combined in both 529 accounts.

Not a bad starting point for helping our kids get through college … but certainly won’t fully fund all of their combined expenses either.

Our “Working” Strategy for Paying for College

Based on a lot of the information we covered earlier, the following is the start to our “working” strategy to help pay for college for our kids. This will be an ever changing strategy … thus the “working” title. And using 529 Plans is only the start of our strategy.

The good news is that a benefit of a 529 Plan is that if we don’t use all the assets for one child, we can use them for another.

So … if we don’t use all the funds for our oldest son’s plan on his college expenses, we can transfer it down to our second son. And then eventually on to our daughter.

Our goal is to do just that by using different tools to help fund all of our kids college expenses. For example, we have started looking into dual enrollment for our oldest son who will be entering high school next fall.

Our 529 Plans are not meant to fully pay for college for our 3 children … but rather help supplement expenses along the way.

And if for some reason we are left with assets still in these 529 accounts … then we can simply take the money out and pay taxes on the earnings.

I plan to continue to document our strategy for helping to fund our kids college education. We certainly don’t have all the answers and there are a ton of moving parts right now … but at least we are trying to understand and educate ourselves on the tools we have available.

Have you started a 529 plan for your children? Are there any other tools you plan to use to help fund your kids college education? What tips or strategies can you provide that have worked (or not) along the way?

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Click Here to Leave a Comment Below 2 comments
Olivia @Birds of a FIRE - January 19, 2018

Have you looked into which states have the best ones? I don’t have kids yet but my little sister is going to college and I’d like to help her out a bit (tax free of course!)

Reply
    John - January 20, 2018

    Honestly, no we never looked into which state 529 plans were better. When we opened up our kids 529 plans 10 and 14 years ago, we just went with what was offered by Fidelity … which I believe is for New Hampshire. I remember reading a post somewhere else that the plans we have were rated somewhere in the middle of states based on costs.

    Probably would have been wise to research back then. And a good idea for some follow up and a future post.

    Thanks!

    Reply

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