How to pay your college tuition bill with a 529 plan

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The cap and gown have been ordered, the caterer booked and the invitations sent. As you prepare to celebrate one of your child's biggest achievements to date – high school graduation- you can't help but think about what's next to come. After years of saving money in a 529 plan, it will soon be time to put those funds to use and pay your first tuition bill. But before you take a withdrawal from your plan, you'll want to make sure you understand how the process works to help ensure you don't lose out on any potential tax benefits, or worse, running into an issue that delays the withdrawal itself.

To help get you started in the process, here are some key decisions you'll need to make.

Who to pay

Generally, 529 plans will let you decide how you want your funds distributed. Ascensus College Savings, which provides program management and administration services to 31 plans, offers online self-service accounts where owners can simply log in and select who they would like to pay. Most plans give you three options – distribute payment to the account owner, the beneficiary or the school. And according to Peg Creonte, Sr. Vice President, Business Development at Ascensus, a few plans will let you make a payment to a third-party, such as a landlord of an off-campus apartment.

How to pay

Once you've decided on where to send your 529 funds, the next step is to select the type of payment. The majority of plans offer two options – you can make an ACH deposit to your bank account, or have a check printed and mailed. Yet with many 529 plans offering self-service accounts, you might be wondering why you can't just pay the school directly.

According to Creonte, the folks at Ascensus felt the same way, which is what led to their new partnership with HigherOne, the provider of CASHNet payment solutions. CASHNet will soon offer School ePay for some of the 529 plans serviced by Ascensus, which will allow account owners to make electronic payments directly to the school.

"We thought it made all the sense in the world to integrate a 529 solution. It's a win for the account owners because now all of a sudden they don't have this multi-step process where they have to put money in their account and then do an ACH from their bank account to the school," she says. "It's also a benefit to the school because their not dealing with checks anymore, and it's a benefit to us here at Ascensus, since it's a much more seamless experience if we're not sending checks."

In some cases an epay solution will also save account owners both time and money. Many parents wait to withdraw 529 funds until they receive a tuition bill, which can be cutting it close if you're mailing a check to the bursar's office. In Creonte's experience, it can take two or three days to deliver a check, but can sometimes take a whole week. This can be an issue when schools won't let students register for classes until their bill is paid, so many end up paying additional fees to have the payment check sent overnight.

"A lot of parents send checks to schools, so they end up taking more of a circuitous path through a university's mail system to get to the bursar's office, since you're dealing with a piece of paper," she says. "Last year we had 30,000 account owners who had checks overnighted to schools through Fed Ex or UPS." And having those checks sent overnight may mean paying an additional fee.

What's more, as 529 plans become more of a mature product with more beneficiaries reaching college age, the industry is seeing a larger number of withdrawals. This increase, along with the growing number of overnight requests, is what really got Ascensus thinking about how an epay solution could really benefit schools and account owners. And they plan to make the program available to even more clients going forward.

"We're really excited about this partnership with Higher One, but there are really a couple of large players in this market so we are potentially looking at integrating with other partners as well," Creonte says. "The more schools that we could offer this solution to, the more coverage we can offer to our account owners."

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Issues to avoid

If you know you're going to need to make a distribution, you can save yourself some trouble by checking your account to make sure its information is up-to-date. Last-minute changes can result in delays to withdrawals. For example, if you request an address change it may put a temporary hold on the account due to fraud prevention measures. The duration of the hold is designed to allow sufficient time for the account owner to receive notification that a change was made and, if it were fraud, to notify the appropriate parties.

An account hold is designed to protect the account owner and the assets in the account. However, ligitimate account changes can still trigger these safety measures depending on the plan, so call ahead to make sure you don’t encounter any issues when it comes time to make your withdrawal.

When to pay

Tuition due dates will vary, depending on the school, but your fall tuition will likely be due in late July or August, and December or January for spring tuition. But that doesn't mean you have to wait until your bill is due to withdraw from your 529 plan. If you plan to take your distribution as a check or ACH deposit you can take the money out once you know how much you'll need, and have it ready to go once the bill comes. Just make sure your plan withdrawals are taken in the same year as the qualified expenses were paid.

A number of colleges also allow payments to be made in installments over the course if the academic year. Families utilizing this type of tuition payment plan will also be able to use the new epay solution from Ascensus where available, instead of having to send multiple checks through the mail.

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