How to Best Use Your 529 when Paying for College

If you have accumulated fund in your child’s 529, congratulations!

You are probably a member of the elusive Savers who plan ahead and hate debt. A savers’ immediate instinct is to use all the designated savings upfront, while the best scenario looks at all options.

The first step is weighing the college choice into the cost, that’s a topic we’ll discuss at a later time in great detail.

Once committed to a college it’s time to switch from putting money into the 529 to paying cash directly to the college.  I have an exact cut-off time for each client based on their personal situation.   We need funds outside a 529 to make four annual direct payments of up to $4,000 to allow you to take AOTC for 4 years for each student (Married Filing Jointly phaseout at $160,000 MAGI) and receive a tax credit of $2,500 each year.

Then take approximately 1/4 of the 529 plan.  As your approach college your 529 investments should have been invested more conservatively, you don’t want to have to spend a substantial amount of the account in a year that the market is down.

Finally, consider a Stafford loan which is has some added benefits over private loans but have an annually increasing amount you could borrow.  So if you need to borrow the full amount available, you have to start with $5,500 the freshman year.  These loans can be reasonably paid off, additional private loans have created the student loan crisis. Loans are a last resort so all other options are weighed in first.

Considering using your Roth?  I advise against sacrificing your retirement for college expenses but if the Roth has been held 5 years you have reasonable options here.

Graduate students have different options than undergrad and many parents rightfully feel that the student should pay their way here.