As many college students worry about paying off student loans, the average cost of college tuition in the United States has consistently risen at two to three times the rate of inflation each year, according to the College Savings Plans Network. The majority of federal financial aid comes in the form of loans, which increases the burden of student loan debt for graduates and families.
To incentivize saving for college, the U.S. Congress created Section 529 of the Internal Revenue Code in 1996, which stated qualified tuition savings programs used for higher education expenses would be exempt from taxation.
The state of Indiana offers its own tax incentives for CollegeChoice 529 direct savings plans in which account owners earn a state income tax credit of 20 percent of all contributions to a 529 account up to a $1,000 credit per year.
Despite the financial challenges of the COVID-19 pandemic, Indiana saw an increase in its total 529 savings during 2020. According to a Jan. 26, 2021, press release from Treasurer of State Kelly Mitchell, savings in 529 plans passed $6 billion for the first time last year.
Ian Hauer, communications director for the Indiana Treasurer of State, said state 529 plans have continued to offer positive investment performance.
How to open a CollegeChoice 529 savings plan
529 plans can be opened and monitored online through the website collegechoicedirect.com. Enrollment forms can also be mailed to P.O. Box 219418, Kansas City, MO 64121.
- Fill out enrollment forms with identification information about the account owner and beneficiary.
- Choose investments, usually an age-based portfolio that fits the beneficiary’s needs.
- Pick a funding method to open the savings plan — check or direct deposit from a bank account. The minimum contribution to open a 529 plan is $10.
- Account owners can change their investment portfolios up to twice per year.
- Savings can be used, without being taxed, on qualified higher education expenses, including rent costs, for any approved college or apprenticeship program in the U.S.
Call the Indiana Education Savings Authority for help opening a 529 account at 1-866-485-9415.
Sources: Indiana Education Savings Authority and collegechoicedirect.com
How to pay bills with 529 funds
On qualified expenses, account owners can pay Ball State from their own bank accounts and reimburse themselves or their beneficiaries with 529 funds using an online form. To pay tuition and fees directly from a 529 account, open a student’s eBill, and select “529 savings plan” from the “make a payment” dropdown menu. First, enter login information for the 529 account, second, enter the amount of the bill being paid and finally, authorize the payment. Ball State charges a $10 service fee on 529 plans, which are deducted from accounts in addition to the amount of the bill.
Contact the Ball State Office of Bursar and Loan Administration at 765-285-1643 or at bursar@bsu.edu.
Source: Ball State Bursar’s Office
“CollegeChoice 529 Saving Plans have continued to enjoy solid growth, even during the challenges of the past year,” he said. “We have found that savers save, and CollegeChoice 529 is a helpful tool for families to meet their education savings goals.”
Dagney Faulk, Ball State director of research in the Center for Business and Economic Research, said she opened 529 plans for both of her kids — Delaney, 16, and LJ, 14 — when they were younger.
“It was mainly for the tax advantage, to be honest. That was a really good incentive for us,” she said. “It’s very easy to set up. There is an array of options that you can choose in terms of how that money is invested once it’s in the account.”
529 plans offer curated “year of enrollment” portfolios that range from more than an 80-percent concentration in stocks to an 80-percent concentration in bonds and capital preservation investments.
“The stock market on the whole has been doing very well this year — that is one of the options you can choose for 529 accounts,” Faulk said. “You can choose the degree of risk that you take.”
Faulk said she thinks 2020 stimulus checks were a likely reason for the increased savings in 529 plans.
“[For] a family where both earners were able to maintain a job and get this extra stimulus money, it would make sense to try and save some of that to pay off debt or save,” she said.
Faulk said she would encourage families who want to save for their children’s higher education or families who have children already in college to open 529 accounts. Students have the option to open an account for themselves as well as long as they are at least 18 years old.
If students earn taxable income, Faulk said she would recommend they open 529 accounts for themselves because of the potential tax credit. She said students can save money for their own beneficiaries in the future if they don’t use all the funds for themselves.
Sharon Kelly opened 529 savings accounts for both of her children, one of them for Ball State sophomore exercise science major Logan Kelly when he was 6 months old.
“Being able to help them pay for college was important to us,” she said. “We started the plan right after both kids were born and [have] been contributing to it ever since.”
Kelly said the process of signing up for and using a 529 plan was relatively simple.
“Everything was automatically deducted from our bank account,” she said. “I didn’t have to write a check every month.”
Kelly stopped contributing to the account once her son graduated from high school and paid for his tuition and apartment rent through the 529.
“It’s a nice way to have that money available to you when your child does reach college age,” Kelly said. “I don’t have to quite panic yet.”
Theresa Lindsey, parent of Ball State junior anthropology, Spanish and Japanese triple major Larsen Lindsey, opened a 529 savings account when her daughter was a newborn. Theresa Lindsey used a financial advisor to help open the account.
“I had to sign some forms, and they explained to me about the contributions,” she said. “I will say that the one thing that did not get conveyed to me as well as I would have liked it was what the penalty is to get the money out.”
If account owners withdraw 529 funds for non-qualified expenses, the money withdrawn is subject to income tax and a 10-percent penalty on any capital gains. Lindsey said her daughter received scholarships to pay for school, so she wanted to withdraw 529 funds.
“Everybody wants their kid to get scholarships, but it doesn’t always happen,” Lindsey said. “I’m very thankful she has. She’s a junior right now and has zero debt, and we’ve used very little out of her college fund.”
Lindsey said, while the 529 plan has several benefits, account owners “need to be good with paperwork.”
“You [have to] keep all your receipts,” Lindsey said. “When you draw money out of it, you have to be able to prove what you use those funds for and that they were for school expenses.”
Lindsey said the remaining funds in her 529 plan will help pay for Larsen Lindsey’s graduate school.
Hauer said 529 plans can be customized by account owners to the investing timeline that makes the most sense for them.
“It’s never too early or too late to start saving for future education,” Hauer said. “Every dollar saved is one less that potentially has to be borrowed in student loans and paid back with interest.”
Contact Grace McCormick with comments at grmccormick@bsu.edu or on Twitter @graceMc564. Contact Mackenzie Rupp with comments at msrupp@bsu.edu or on Twitter at @kenzieer18.